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MINING CONTRACTSHow to read and understand them

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M I N I N G C O N T R A C T S

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C O N T E N T S

F O R E W O R D

Foreword

C O N T E X T

The Mining Industry

Laws and Contracts

The Negotiating Table

M I N E O P E R A T I O N S

Introduction to Mine Opera tions

Legal Regimes

Reconnais sance and Explora tion

Feasibil ity

Production

Closure

F I S C A L I S S U E S

Money Matters

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Fiscal Regimes

Special Challenges

How to Spend It

E N V I R O N M E N T A L A N D S O C I A L I S S U E S

What Are the Issues?

Using the Contract to Manage the Issues

Finding Guidan ce and Answers Outside of the Mining Contract

E C O N O M I C L I N K A G E S

Introduction

Mining and Local Content

Mining and Infrastruc ture

L E G A L A N D N E G O T I A T I O N C O N S I D E R A T I O N S

So You Think You Need Help After All?

170 Years at the Table: Confessions of a Negotiator

Dispute Avoidance and Resolution

Planning for Trouble

To Publish or Not to Publish?

A P P E N D I X

Glossa ry

List of Commonly Referenced Contracts

Colophon

F O R E W O R D

F O R E W O R D

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F O R E W O R D

We are happy to present the first edition of “Mining Contracts - How to Read and Un-derstand Them.” Like its sister book on oil contracts published at the end of 2012, it hasbeen produced in just five days as a col lective effort using the Book Sprint technique.The authors and collaborators began work by the shore of the Chesapeake Bay inMaryland, USA, on Monday, December 9 and finis hed on Friday, December 13, 2013.

A Book Sprint is a facilitated pro cess through which a small group of contributors with awide range of expert ise and perspectives come together to write a book col laborativelyin five days. The authors started with a title only, spent a day deciding on an outline,and then wrote, illustrated, edited, proofed and “published” the book in the remainingfour days. Building the book in a sprint has resulted in a comprehensive resource thatbenefits from the dynamic interaction of a diverse group of lead ing experts working atthe intersection of mining and economic development. As with the oil book, the BookSprint methodology has two major implications for its content.

First, it is a work of optimization, not perfection. We are confident in the quality and thevalue of the content, but despite the authors’ best efforts during the sprint, we are surethe occasion al factual error or typo will have remained, and there will certainly be gaps.These are unavoid able when writing a book of over 150 pages in under a week. We hopethis book becomes a living document; that this edition is just a first pass at a work thatwill be updated and expanded over time. We invite our colleagues to criticize vigorous-ly, and in this way help our organizations and our partners im prove the text for the nextedition.

Second, not every contributor - nor every organization sponsoring this ef fort - agrees

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with every de tail or judgment in the book. We do, however, share the vision that a re-source of this kind is needed, to equip governments, citizens and other stakeholders tobetter understand the content and the impact of mining contracts so that they cannegotiate, an alyze and monitor contracts more effectively. We also all support contracttransparency, the idea that major extractive industry agreements should be publishedto help build more trust and better governance around these industries. The analysisand quotations in this book, of contracts from Australia, Ecuador, Guinea, Li beria, Mon-golia, Niger, Peru, Sierra Leone and elsewhere, are just a small sample of what is pos-sible if more contracts come into the public space.

Apart from that, the goal is for this book to stand as an informational introduction tothis complex and often controversial subject. There were lively debates among the aut-hors throughout the week, and personal opinions implicitly inform the way the authorshave sequenced and addressed various sub jects. This book is the product of team work,not group think or a “consensus” document. We trust that read ers will quickly recogn-ize, as we have, the value of this unique drafting pro cess.

The organizing institutions are: the International Senior Lawy ers Project (ISLP), Op-enOil, Revenue Watch Institute-Natural Resource Charter (RWI-NRC), and the Vale Col-umbia Cent er on Sustainable International Investment (VCC). Some financi al sup portwas pro vided from within our organiza tions, and more was generously pro vided byAustralian Aid, the World Bank Institute, the World Bank Sustainable Energy, Oil, Gasand Mining unit, and the German Federal Ministry for Economic Cooperation and De-velopment (GMZ) through GIZ. Special thanks go to Anna Shakarova at ISLP formobilizing such a wealth of legal expertise for the project.

The contributors to this book are:

Joseph Bell, of counsel, Hogan Lovells, RWI-NRC and secretary of the Board, ISLP;Zorigt Dashdorj, Mon golia Development Strategy Institute Board member; MatthewGenasci, RWI-NRC; Jeffrey Davidson, Robert M. Buchan Department of Mining,Queen's University, Kingston, Ontario; Juan José Herrera Extractive Industries ProgramCoordinator, Grupo Faro, Ecuador; Michael Jarvis, World Bank; Lise Johnson, VCC;Susan Maples, legal advisor; Herbert McLeod, leader of the Sierra Leone governmentnegotiating team for minerals; Sam G. Russ, Deputy Minister for Operations, Ministry ofLands, Mines and Energy, Liberia; Salli Anne Swartz, Partner, Artus Wise Partners, Paris,

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ISLP Volunteer; Perrine Toledano, VCC; Johnny West, Open Oil; and Jeff Wood, RetiredPartner, Debevo ise & Plimpton and Volunteer, ISLP.

Adam Hyde, who invented the Book Sprint technique, once again facilitated the book,assisted by Barbara Rühling and Clara Roorda, Research As sociate at VCC as target rea-der. The Book Sprint team also included Henrik van Leeuw en (graphic design), RaewynWhite (remote proof), and Eyal Holtzman & Myrthe Stel (HTML book design). We arealso grateful to Debevoise & Plimpton for pro viding a proofreader in the eleventh hour.

The book is issued under Creative Commons license (CC BY SA). This means anyone isfree to excerpt, translate, copy and re-use for any purpose without seeking permission –as long as your work is also is sued under Creative Com mons li cense.

Going forward, we anticipate trans lations into multiple languages, and that the bookwill provide material to be integrated into training courses run by our organizations andothers.

One of the fallacies sometimes raised by those who oppose contract trans parency isthat the broader public is not equipped to read contracts or analyze them in anymeaningful way. We hope that this book will become a valuable tool to broaden andenrich public debate of the mining industry, by and for the hundreds of millions of peo-ple around the world for whom it is an issue of vital public policy.

Daniel Kaufmann, President, RWI-NRC

Garth Meintjes, Executive Director, ISLP

Lisa Sachs, Director, VCC

Johnny West, Founder, OpenOil

C O N T E X T

T H E M I N I N G I N D U S T R Y

L A W S A N D C O N T R A C T S

T H E N E G O T I A T I N G T A B L E

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T H E M I N I N G I N D U S T R Y

The significance of minerals and the uses they have served across human histo ry canhardly be overstated. Minerals are so important that ages of history have been namedfor them: the Copper Age and the Iron Age. Mines have been discovered dating to40,000 years ago. Greeks, Romans and Egyptians wrote treatises about miningthousands of years ago. Nations have come to greatness and fallen on the rising andebbing tides of miner al commodity prices. Silver and gold have taken countries tofaraway lands to find more. Every continent has had mining of ores in some form orfashion in its history. Min ing is, in many respects, ancient and universal.

And it remains vitally important today.

As mining has become more of an industrial process in many parts of the world, miningcontracts governing that process have proliferated as well. And, as relatively “easy ac-cess” deposits are becoming fewer and farther bet ween, mining com panies are going tonew loca tions to hunt for new mineral deposits.

This change has resulted in the rising significance of the minerals sector in the globaleconomy. One study recently showed the number of economies which depend on min-ing rose from 46 to 61 in the period between 1996 and 2011 - and the degree of depend-ence also increased, according to Oxford Policy Management.

Some of these co untries are among the world’s poorest. Others are among the world’swealthiest.

Mine development holds much pro mise for host countries as the key promoter ofgrowth through export earnings, economic ex pansion, eventual di versification of the

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economy, and massive poverty alleviation. Fluctuating but rising demand for mineralsap pears to provide a logical and economic way to build new infrastructure in rapidly de-veloping nations and replace the old in mature economies.

An aspect of mineral resources drives the dynamics that underpin much of this book:minerals are depletable, non-renewable resources. When they are gone, they are goneforever. The finite nature of minerals makes them unique as com pared to other indust-ries and revenue sources for companies, governments, and citizens in resource-rich co-unt ries.

But past experi ence also suggests that unless there is prudent management of these re-sources, these opportunities could be lost. Or, worse, catastrophic environmental andsocial consequences can occur.

"Be careful to learn the nature of the locality, its roads, its salubrity, its overlord, and theneighbours.”

“The miner should not start mining operations in a district which is oppressed by atyrant."

This is stunning ly good advice for anyone starting out on a mining pro ject. No, it doesnot come from one of the CEOs of the major min ing companies, but instead it comesfrom Georgius Agricola, from his De Re Metallica, Book 1 written in 1556.

You read that right: 1556.

And just as natural resource extra ction has been around for a long time, so have thecluster of issues that have come to be associated with it. Al though "Resource Curse" wasonly coined as a phrase at the end of the 20th century, its features were also around inAgricola's time. Economic historians have developed theories to describe how, after the"discovery" of the Americas by Columbus, his imperial master, Spain, fell prey in the six -teenth and seventeenth centuries to th ings like a drop in productiv ity in traditional li-velihoods, corruption, political and social stagnation and conflict - because of hugeamounts of gold arriv ing from the New World.

The mining industry has of course become far more industrial since the days of Ag -ricola. This book is, largely, about a mining industry that he would barely recognize.

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One with earth-movers larger than a house. Pits that go over a kilomet er into the earthand mine sites so big they are visible with the naked eye from space. An industrydominated by machines: mechanized water treatment facilities, huge sites with just ahandful of engineers on site man aging the machines, not leagues of people scratchingout ore by hand. Giant mines that consume as well as pro duce voraciously. Sites thatneed an electricity plant big enough to power a city, enough water to reduce a river,with their own roads and rail ways, their own settlements and sometimes security for-ces.

And with scale and machines have come capital investment on an unprecedented scaleand, accordingly, lengthy contra cts and detailed laws. Unless Agricola were also a lawy -er, and histo ry somehow forgot this detail, he would hardly recognize the subject of thisbook: min ing contracts.

The rest of this book will focus primarily on mining contracts and the legal frameworkssurrounding them. But these contra cts reflect the market forces and realities of supplyand demand. The real world drives the legal framework.

In order to un derstand the full im plications of these agreements and their ramificationsfor the development of host co untries, it is useful to examine the operations of the sec-tor at the global level, how the markets function and are structured, and evaluate thelinks in the supply and value chains for the average mineral.

M O R E O F J U S T A B O U T E V E R Y T H I N G

The big picture for the way mining has evolved in the last two decades is quite simply:“more”. Just more.

More of everything. More mining companies spending more money to pro duce morestuff which is more speculated on and then sold for more money to meet more demandthan ever be fore.

Accord ing to The Economist, leading co untries consumed 50% more tin in 2011 than atthe turn of the century, 60% more nickel, 60% more lead, 60% more coal, 40% morezinc, 30% more copper and 20% more silver and gold. Iron ore pro duction has nearly

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tripled in that time. A billion tonnes more are produced today than at the end of the20th century.

Prices have also rocketed. Gold, silver, lead, zinc, nickel and copper all tripled in price inthe first decade of the century, and although some com modities have fallen back from2010-11 highs, they are still all high in historical terms and many analysts expect de-mand to stay strong, with the occasional blip. Some economists talk of the world nowbeing in a commodities “supercycle” such as has only occurred three or four times sincethe Industrial Revolution.

Part of this, it is true, can be ex plained by the world's rising population – there are an-other bi llion people alive on the planet since the year 2000. But another, perhaps largerpart of it is rising li ving standards, as parts of what used to be called the developingworld rush towards prosperity as best they can.

China's rise as global “swing consumer” of a number of com modities has been stunning-ly fast. Twenty years ago, it bought eight percent of iron ore traded on world markets.Now it is 60%. Across metals as a whole, its share has risen from 3% to 30% and thatdemand shapes the global market for individual commodities in very par ticular ways.Demand for copper is likely to remain strong, for exam ple, because China is planning toadd 700 gigawatts to its domes tic grid by 2020 and copper fibre is an integral part ofgrid networks. China’s demand for imported tin is also li kely to rise sharply as its bill ionconsumers eat more processed food.

There are also more mining companies on the scene now. Ris ing demand has led“junior” less capitalized companies into more remote and harsher locations in morespeculative exploration, where they may seek quicker returns. Other com panies may belarge but new to the international scene, lured out of national strongholds by crazy de -mand and prices.

And just as produc tion, consumption and price all shot up in the last decade, so didspeculative investment in financial instruments around commodities. These instru-ments initial ly al lowed traders who needed real quantit ies of stuff to lock in their priceat some future date, or to “hedge” the price against other assets, and they have been en-thusiastically embraced by investment banks and funds. The United Nations es timatesthe number of commodity futures contracts traded more than doubled every year from

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2001 to 2011 as a slew of commodity trading indexes sprang up. The role of this “finan-cialization” is hotly dis puted. Some say it has driven the price rises, others say it has pro-vided liquidity at a time of unprecedented growth in demand. But it is un likely to goaway.

Of course, the clear trend toward “more” and “bigger” has one important caveat: Smallermines, and artisanal mines in particular, still play an im portant role in many countries.And these can have disproportionately large impacts - on employ ment, on the en viron-ment, and on the soci al fabric. Throughout this book we deal al most exclusively with in-dustrial mining, but it is im portant to remember that this is not the whole story.

We live in a globalized world, and the peo ple and communities affected by mining op-erations are clearly aware of these trends, even if they may not pore over the details. Weare once again in a global expectations game which is hard to balance. The World GoldCouncil announced that the gold industry created $78 bi llion of value in the globaleconomy in 2012, but the Al Jazeera presenter asked their spokesman why only aneighth of that went to the workers. Companies stress the pressure on their bottom lineas costs have skyrocketed. Meanwhile the striking miners of Marikana were demand ingtheir wages be tripled when they were shot dead in a con frontation with the South Af-rican police. Other mine riots have broken out recently in Guatemala, Zambia, and Ar-gentina to name a few. A Chatham House report states that there were 126 active localdisputes over mining in Peru alone.

These pressures with in the mining sector, coupled with broader trends toward in-creased corporate accountability and increased attention on the broader im pacts ofmining on society, have spurred a number of innovative initiatives such as the Extra-ctive Industry Transparen cy Initiative (EITI).

Several African governments have announced they are reviewing their mining contractsbecause of widespread perceptions they have not captured enough of the last decade's“superprofits”; other governments around the world, including in Mexico, Australia, andQuebec, have announced changes to their tax regimes aiming to capture more of theresource rent; and Indonesia's parliament is introducing an ex port tax on some miner-als in an effort to encourage beneficiation.

One response by a left-wing movement centered in Latin America seeks to define “post-

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extractivism”. Since getting minerals out of the ground triggers so much turbulence,they argue, the only way out is to sharply reduce its prominence in economic develop-ment, and re sist global forces that seek to extract it.

There is fer ment every where, even in Swiss villages where residents elected to repat-riate some of what they regarded as excess profits earned by com modity trading com -panies based in Switzerland, such as Glencore, to source countries in Africa.

Concern is on the rise for mining companies as well. Despite what could be viewed as aninexorable rise in com modity prices and a mining boom that could hardly see anythingmore than a "blip" in minerals prices, PwC is reporting that investor confid ence in min-ing companies is declin ing relative to the broader equity markets. And although profitsreached re cord highs in 2011, they came against record costs, which meant that profitmargins, and the value of such companies, stayed flat or even dipped. Since then, priceshave come off their historic highs, but costs have remained high and the com panies arein trouble. Min ing stocks fell nearly 20% in the first four months of 2013.

Deloitte has chimed in as well: the list of problems mining companies faced in 2013 in-cludes rising costs, falling prices, supply-demand imbalan ces, and decreased productiv-ity. Urging companies not simply to "wait out the swing", their annual review en-couraged compan ies to embrace innovation, in cluding systematic use of soci al mediato increase their engagement with communit ies. Hence the need for this book whichseeks to describe neutrally, from an informational point of view, the legal and contra-ctual frameworks that surround mining operations around the world.

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L A W S A N D C O N T R A C T S

Every count ry has its own unique his tory, peoples, culture, food, music. Is it influencedby other cuisines, languages, and cultures? Yes. But it is always, in some way, unique.

The mining laws and contracts in any country are similarly uni que. It is important tostress at the outset that this book cannot and will not cover every contract type, every th-ing in a minerals law, or every law relating to mining for any given country. A contract orlicense often requires a reference to a law, which may reference another law, that thenreferences several sets of regula tions. Looking for an an sw er to a particular ques tion re-garding a specific project can send a person on a long journey across numerous articles,clauses, phrases, and sub-clauses. Given that complexity, this book pro vides a road maphelping to locate what you can find; a guide on how to get to certain places in the legalframework; an approach to answering questions.

Some relatively common principles help that task. No matter what the legal system is, amining company will always seek a recognized legal right to engage in mining activitiesfrom the state. Dif ferent licenses will cover different phases of the mining pro ject, in-cluding exploration, production, and reclamation. While most countries in the worldhave mining codes (or mining laws) governing how they grant these rights and regulatethese proces ses, even if there is a country that does not have a mining code, the statecan issue decrees, executive orders or perhaps enter into contracts in the ab sence of amining law.

The acquisition of a license or contra ct doesn’t neces sarily mean that the ow nership ofthe sub-soil resources is also transferred. In fact, in most cases, the state retains ow-nership over the sub-soil resources. The state's ownership of the sub-soil in most cases

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is the rationale for the government to impose a "royalty" (see the "Fiscal Issues" sec tion).Only in a han dful of cases, including the United States and some Canadian provinces, isownership held by the owner of the land surface.

The whole point of a license or contract is to secure an exclusive right to undertake aparticular activity on a particular piece of land. This is a fundamental part of the miner-als law in any country, and is addressed this section through answers to some frequent -ly asked questions on mining laws and contracts.

W H A T I S " T H E C O N T R A C T " ?

There are many types of contracts in the minerals sector. This book concerns it self withthe contract that governs the re lationship between the national government and licen-se holder for an exploration and/or mining project. In any legal framework, there is acontract that is "The Contract". This contra ct (or license) provides an ex clusive right to acompany to ex plore over a certain area of land and/or mine the discovered resources inex change for royalties, taxes, and other obligations.

These “contracts” can have any number of names: Mineral Development Agreement,Explora tion and Exploitation Agreement, Mining Investment Ag reement, MiningContract, Mining Con cession. The im portant point here is: do not get invested in thename and what is on the outside cover of the docu ment. No matter the name, thesecontracts are all deal ing with the same kinds of issues, though perhaps at varying levelsof detail. The differ ences in the name of the contract is not an im portant factor. It ismostly a matter of historical accident.

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I S A M I N I N G C O N T R A C T T H E E X C E P T I O N O R T H ER U L E ?

Contracts are not required or used by all co untries. The countries that do not governmining by contracts instead define all rights and obligations by the specific license andgeneral ly applic able laws. Comprehensive contra cts are more often em ployed at theearly stages of mineral sector development when the legal framework is still evolving.In contexts in which the legal framework and government institutions are fairly strong,it is more likely that the parties rely on general ly applicable law to govern their respec-tive rights and obligations. In this kind of environment com panies can rely not only onthe comprehensive nature of the legal framework, but also on the relative stability ofthe legal environ ment and transparent governance mechanisms that guarantee thesafety of their investment. For instance, provinces in Canada such as British Col umbiaand Ontario do not have formally written contracts between the government and thecompany, though there are vari ous other contracts involved, including contra cts withthe indigenous community. Similarly, contra cts are not used at all in South Africa, alsoa country with a long histo ry of mining.

D O E S T H E L A W T A K E P R E C E D E N C E O V E R T H EC O N T R A C T ?

Now this question has an interesting answer. Theoretically, the answ er is very clear:there is a hierarchy of laws, with the Constitution at the top, then laws, regulations, andcontracts sitting way down at the bottom. Laws take precedence.

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But theory does not always match reality. When you get into the real world, the answ ermay be quite different. There are cases where contracts are specifical ly designed to takeprecedence over domestic laws (though sometimes the laws will not allow this).Furthermore, there are legal stability clauses and ag reements that may affect thehierarchy of laws. This topic will be treated in more detail in various other sections ofthe book.

However, as it was mentioned earlier, the more comprehensive the domes tic legalframework, the stronger the tendency is for domestic laws to take pre cedence.

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W H A T A B O U T C O M M U N I T Y D E V E L O P M E N T A G R E E -M E N T S , L O C A L A G R E E M E N T S , A N D O T H E R C O N T R A -C T S ? W H E R E D O T H E Y F I T I N T O T H E P I C T U R E ?

There are a number of contra cts that may also be signed in addition to "The Contract"between a company and the national level government. These will serve a differentfunction from grant ing the exclusive right to mine. There may be contracts sig ned bylocal authorities and license holders that re gulate local rights and obligations. There aresometimes various contra cts for usage of water and infrastructure concluded betweengovernment authorit ies and the license holder. Contracts could be concluded betweenvarious stakeholders, including for instance non-governmental organiza tions, par-ticipating in the mining project. In short, there could be hundreds of contracts as-sociated with any given mine, but one is the most important of all, and that is the min-ing contract between the national government and the company granting that ex -clusive right to conduct mining opera tions.

W H A T D O E S T H E C O N T R A C T C O V E R ?

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A contract could cover a wide range of issues such as operational obligations, fiscal andeconomic development issues, environmental and social issues, dispute resolu tion,local employment and procurement, change of ownership or management control,among others. In a relatively comprehensive legal environment, a contract could be ex-tremely short. A contract in one co untry may be 250 pages and only 15 pages in another.

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Example of limited scope agreement

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Example of a Comprehensive Agreement

In the past 20 to 30 years, pro bab ly the biggest developments in mining laws andcontracts are in the social and environmental areas - so much so that there is an entire

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section of this book devoted to those topics. Areas like social responsibility, humanrights, anti-bribery provisions, and local consultations are em erging as new issues in thecontracts. New deal struc tures are also appearing that have infrastructure, public hous-ing and other non-monetary forms of benefits for governments. This is often associatedwith the re cent entrants to the market such as Chinese com panies.

This book cov ers a wide range of is sues typical of a com prehensive contract includingfiscal issues, core operational obligations, environmental and social issues, economicdevelopment, dispute resolution, equity ownership, and force majeure, among others.However, it needs to be stated again that if the domes tic legal environ ment addressesthem sufficiently, all issues co vered in the book would not necessarily end up in thecontract.

H O W L O N G D O T H E C O N T R A C T S L A S T ?

There are two main practices when it comes to the duration of contracts.

One way is to set a hard time limit: 10 years, 15 years, 25 years. For a company to want toinvest, the contract period will need to be of suf ficient duration to allow the company torecoup its investment and make a profit. There will typically be the opportunity for ex-tensions as well.

The other practice is to have the contract last as long as there is an economic depositthere to mine.

Under either practice, there are closure and reclamation obligations, which are co veredfurther in the sec tion, "Mining Opera tions".

B A C K T O T H E B E G I N N I N G : G E T T I N G T H E C O N T R A C T

We seemed to have jumped to the end of the contra ct without talking about how youget one in the first place. Let’s end with the beginning.

The vast majority of countries around the world use a first come, first served system of

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is suing licenses and contracts for the right to conduct mining activities on a piece ofland. This sys tem makes sense, as it theoretically should not favor any particular partyand should incentivize people to come and get licenses to start mining.

This is, however, changing, and more and more countries are holding com petitive bidsfor the right to mine or explore. Competitive bids can have several advantages: they canentice policy-makers to anticipate, plan and prioritize the benefits from mineral pro-jects that they would like to rea lize, since those benefits can be the object of the bid;pre-qualification criteria, fees to participate in bids, and upfront bonus pay ments candeter speculation and license idling; and trans parent bi dding rounds can decrease risksof corruption compared to first come, first served systems or direct negotiations.

However, without strong trans parency provisions and oversight, competitive bids canpresent the same challenges of corruption and misallocation of li censes and resourcesas the other systems. And, indeed, issues like license idling and corruption can also betackled in other allocation systems. Furthermore, when a government lacks geologicalinformation, it can be harder to organize a successful and competitive bid round; inthose instances, the government could either start with a first come, first served sys temor invest in revealing geological in formation (for instance, with support from the USand British Geological Surveys).

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T H E N E G O T I A T I N G T A B L E

The mysterious "negotiating table". Who sits at it? What do they do? What are some ofthe "tricks of the trade" - what do good negotiators do? Do people real ly pound their fiston the table and threaten to walk away? Who is really in charge? And perhaps most im-portantly, who is driving the process behind the scenes?

This chapter answers many of these questions. The chapter, "So You Think You NeedHelp After All," also provides guidance on how to choose legal co unsel. And, we have"170 Years at the Table: Con fessions of a Negotiator" to pull back the curtain even moreon the negotiating table.

W H O S I T S A T T H E T A B L E ?

The choice of who should sit at the negotiating table and who will be representing thevarious parties can be (and often is) one of the most im portant decisions that will influ-ence the outcome of the negotia tions.

The main actors include the government, companies, lenders, and civil society.

Government: At the TableThere is no one structure for government negotiating teams. Practice is di verse acrossthe globe, but can be grouped in three main categories, based on who takes the lead:

Ministry of Mines, potential ly with involvement of other ministries

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Inter-ministerial committee, which could be led by the Ministry of Mines, NationalMining Company, the Executive's Office, National Investment Com miss ion or otherministry-level representatives

National Mining Company, potentially with invol vement of other ministries

Reasonable minds can dis agree on which structure works best. In all likelihood, anystructure can work if there is the political will for it to do so. Which structure a countryuses will depend largely on the country's governance struc ture and history of practice inthis area.

It should be noted that bigger is not necessarily better when it comes to seats at thetable. A single negotiator or 3-4 negotiators may be much more efficient than a groupof 15. Confusion, distraction, and divide-and-conquer techniques can be employed forlarge negotiating teams. One negotia tion was held up by the fact that the sevennegotiators in the room on the government side typical ly needed to achieve unanimityon all is sues. This isn't to say that a large team shouldn't support the negotiators andhave their views taken into account; only that more is not always merrier when it comesto face to face negotiations.

If there is a Nation al Mining Company (NMC) or some other speci al purpose vehiclecreated by the govern ment to oversee mining permitt ing and operations, its represen-tative(s) will sit at the table, usual ly with a team of legal, finance (fisc al), economic andmining advisers and experts. Such advisers and ex perts can be government employeesor outside consultants depend ing upon the expertise and resources of the government.

If there is no NMC, the govern ment will often be represented by em ployees of the Min-ing Ministry, with varying degrees of official or unofficial involvement from otherministries.

Which other ministries might show up at the negotiating table?

Here too, there is no consis tent practice across all countries all of the time. One couldreasonably expect re presentatives from the Ministries of Justice, Environment, Laborand Employment, In digenous Populations (if existing), Culture, Finance (and Budget),Strategic Plann ing (if existing), Land Development/Planning, National InvestmentCommiss ion, etc. Representatives of the Central Bank may be involved, and some co -

The Negotiating Table

24

untries provide for ad hoc ex perts to be official ly part of the team.

The following example is from Liberia's Mines and Minerals Law 2000. Later laws havesince modified this particular structure - as they are apt to do! However, it remains agood example of the legal language that can be used to establish a negotiating team:

"Section 3.4. Establishment of Minerals Technical Com mittee. There ishereby established a Minerals Technical Commit tee composed of thefol lowing:The Minister of Lands, Mines & Energy (Chairman);The Ministry of Justice;The Ministry of Finance;The Ministry of Planning & Economic Affairs;The National Invest ment Com mission;The Ministry of Labour;The Coun cil of Economic Advisors to the President of Li beria;The Central Bank of Liberia.Section 3.5. Power of the Com mittee. The Minerals Technical Commit-tee is hereby empowered under the chairmanship of the Minister tonegotiate and conclude agreements [...]"

The most successful government negotiators are those who have formed a coherentand coordinated government team with a lead liaison who reports directly to the primeminister or president. It is helpful if the person who heads the team is appointed di rect-ly by the president or prime minist er and can obtain guidance when required.

The In ternational Mining Company (IMC): At the TableThe IMC may be acting alone, with a Joint Venture (JV) partner, or as the manag ingpartner of a Consortium of business entities. Who the IMC or JV sends to the table candepend on a lot of factors: the size of the company, how important it considers a par-ticular negotiation or government relationship, or its gener al approach to negotiationsworldwide. The IMC side of the table may have a regional di rector, in-house counsel,and other in-house experts. Small companies may have a CEO or other very high levelrepresentative at the table.

Context

25

The IMC or JV will be typically assis ted by its own in-house legal, fin ancial (fiscal),economic, geological, market ing and technical (engineering and/or infrastructure) ad-visers. The IMC or JV may also call on internal or third party advisers to help address anynumber of issues, particularly is sues that may be very local to that negotiation, for ex-ample, indigenous peoples, community, cultural heritage or other social issues thatmay be raised during the negotiations. In some cases, the IMC may even insist that cer-tain community issues be covered in the agreement. While com munity groups or civilsociety organizations do not usual ly have a seat at the negotiating table, this does notmean that their voices cannot be heard; the IMC (as well as government) may be opento discussions and consultations in advance of or during negotiations.

It may be worth noting here that in all but a very few instances, the IMC and the govern-ment will often not be negotiating from the same in formation. While the IMC may sub-mit a number of stud ies on the geologic potential of the area, engineering plans, costsof production, and other information that is critical to determining negotiating posi-tions, the IMC will likely have more tools at its disposal to understand, analyze, andframe that information in a way that is be neficial to the company. And this makessense: mining com panies are in the business of mining! This is their prima ry purpose.The challenge for governments is to meet that level of expertise as best they can. Anumber of strategies for doing so are included in this book.

Lastly, the challenge of negotiating with IMCs can be compounded if there is a JV orConsortium arrangement. More interests at the table usually means more issues towork through. JVs and consortia are often necessary for large-scale, industrial miningprojects. Such arrangements divers ify the risks for the main project company, can giveaccess to more equity finance, specialist skills or technologies (e.g., in infrastructure de-velopment), and even assist in securing part of the mineral supply.

Even with multiple companies at the table, ready to put their own cash into the project,that may not be enough. Enter: the lenders, the people with the money.

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Lend ers: Not at the Table (but hovering closely in the background)Mining projects are expensive. Very expensive. Instead of coughing up all of their owncash, as suming the company even has enough, the IMC or the JV will pro bably turn tocommercial lenders to pro vide debt. For some mining pro jects, debt could be used tofund as much as 70% of the total costs of building the mining project, with the thirdparty lender having more cash tied up in the project at certain moments in the mine lifecycle than the IMC or JV.

For this reason, the lender will often want to be quite well-informed about the negotia-tions over what will be, in effect, its money for a significant period of time. They maywant to be informed of progress or problems encountered at the negotiating table, andwill certainly have made their own conditions and ex pecta tions clear to the IMC as partof the financing or equ ity agreements drawn up with the IMC, such as default/breachand other provisions that will need to be harmonized with the terms of the miningcontract or vice-versa.

Who are these lenders behind the scenes? They could be private commercial banks likeHSBC, Barclays, RBS, Deutsche Bank, Credit Suis se, as well as public multilateral lend-ing institutions such as the International Finance Corporation or "IFC" (a member of theWorld Bank Group).

These actors, while not officially at the table, have been important in the overall con-tent of mining contracts. For example, today most of the commerci al and larger privatelending institutions subscribe to the Equator Principles, and IFC involvement in a pro-ject means compliance with its Social and Environmental Performance Standards(more about this in the "Environmental and Social Is sues" section of the book). Thesestandards have been almost universal ly embraced as common practice in these areas,and contracts may make these standards legally binding. Just because a player is not atthe table does not mean they cannot be highly influential.

Who is Usually Absent from the Negotiating Table? (Answer: AlmostEveryone)Frankly speaking, just about every one else is usually not at the table. But there are a fewexceptional circumstan ces in which other groups may be invited to take part.

Context

27

Representatives of community groups may be invited to participate in those parts of anegotiation that bear on environ mental protection, community development, benefitsharing or social impact management.

Some times, the govern ment will include in its team representatives from ministriesthat are responsible for cultural and other issues af fecting local populations or sub-national government interests. This presupposes that there is a government entity ofsome nature responsible for oversight or coordination of indigenous peo ples, sub-national government or local community interests in general.

The more likely way that civil society will participate is through a consultation processof some sort, though that of co urse is not the same thing as being at the table. Com-munity Development Agreements and other community proces ses are discussed morein later sections.

G E T T I N G T O T H E T A B L E

Now that the team of negotiators are at the table and every one knows - or thinks theyknow - who is representing what interest groups and entities, and who has authority tobind who, the negotiations can final ly begin. The moment of truth has arrived: partieswill come togeth er and go into the intel lectual equivalent of hand-to-hand combat.Angry words will be exchanged. Strategies and stratagems will be em ployed; bluffs,maybe even outright lies. Who will crack first? Who will cave on the crucial points? Whowill come out on top? Which negotiator will win in this test of wit and will?

We have some disappointing news. For those that pictured men in suits debating eachother to the death in a wood-paneled conference room in New York or Hong Kong, thatis not quite how it happens 99% of the time.

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Negotia tions are often marking up a word document with track changes and then send-ing that to the other side by email. More often, it is a person be hind a computer - maybewith a bi nder with laws and contracts, and probably several cups of coffee - reading andwriting for hours at a time. The ratio of hours spent at the table, face to face with theother part ies, to pass ing drafts of a word document is hard to accurately estimate; butbe assured that in almost all negotiations, far more hours are spent away from the tablethan at it.

An IMC may start the negotiations with its model ag reement(s), or the governmentmay start with its model or a chosen agree ment al ready in force that it views as its cur -rent position and practice. A model contract is one in which the general structure of anagreement is laid out, but with a number of areas left open for negotiation, such as thefinancial terms, exploration work pro grams, and commun ity benefits, for exam ple.Other issues may be open for negotia tion as well.

What's the use of that, you might ask? First, it saves an enormous amount of time.Drafting from a blank sheet of paper would be ex tremely inefficient. Second, ex chang -ing preferred models or redacted examples often will reveal the part ies' expectations: aparty will rarely share a model or contra ct that does not include its favorite provisions.(And if a side does send a model that goes against its interests, this would probably be apretty clear ex ample of poor negotiating strategy, if there ever was one).

By exchang ing models or preferred redacted contracts, the parties will be able to assess

Context

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the first negotiating positions that each party may put on the table. These perceived ex-pectations should not be ignored because they will surface at some point in thenegotiations either as express requests or implied issues. This does not resolve whichmodel or redacted contract will form the basis for the negotiations but it will be a win-dow into the parties' wish lists.

Once the parties determine which agreement or agreements they will negotiate from,the fun begins. It is time to dive into the heart of this book, the text of mining contracts.

M I N E O P E R A T I O N S

I N T R O D U C T I O N T O M I N E O P E R A T I O N S

L E G A L R E G I M E S

R E C O N N A I S S A N C E A N D E X P L O R A T I O N

F E A S I B I L I T Y

P R O D U C T I O N

C L O S U R E

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I N T R O D U C T I O N T O M I N EO P E R A T I O N S

Some of the great mines of history have run for hundreds of years. Sweden's "Stora Kop-parberg" (or the "Great Copper Mountain") is a mine that las ted from the 10th century tothe early 1990s. While that is an extreme example, finding a resource, building a mine,and clos ing it down responsibly is general ly a long process. Reconnaissance and ex-ploration may involve decades of increasingly focused activ ity, by both governmentsand private companies, in an effort to find resources and identify those that may beworth developing. After that threshold is crossed, it may take many more years offeasibility studies and pro ject appraisal, along with extensive consultations withgovernment agencies, local communities, financial institutions and other key parties,before a company is able to move on to mine development and ultimately production.

And then, pro duction may last from anywhere from a few to a few hundred years.

But that's if you're lucky. Most ex ploration activity will fail to result in a promising dis-covery, and many promising discoveries will never make it to the mining phase.

This chapt er takes a closer look at each step in the mining life cycle, from high-level re-connaissance through closure, detailing some of the key considerations during eachstage. Some of the topics co vered relate to technical or engineering issues, providing anoverview of the “footprint” and activit ies of a mining operation at a given phase. Otherconsidera tions relate to the legal framework, including broad prin ciples that runthrough the mining life cycle as well as key regulato ry processes and decision-pointsthat govern and feature in particular stages.

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And this will come as no surprise to anyone, but money is important. Very important.Understand ing not only the cost of each phase, but where the money tends to comefrom, will therefore also be covered in the sec tions that follow.

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L E G A L R E G I M E S

L A N D , M I N E A N D M I N E R A L S O W N E R S H I P

Minerals in the ground may be owned by the state or be owned privately. For instance,in the Uni ted States, subsoil rights under privately held land are private ly owned; sub-soil rights under state or federal lands and offshore are held by the federal and stategovernments. In most of the world, the state, or more broadly, the people, own allnatural resources. This includes miner als below the surface even when the surfacerights are held by others. This ownership is often set out in the Constitution and re-peated, but in an in creasingly specific form, in the mining act and the contract itself. Forexample, Article 1 of Ecuador's Constitution states:

“Non-renewable natural resources of the State’s territory belong to itsinalien able and absolute assets.”

This general statement of land rights becomes more specific in a mineral law. Ecuador’sMining Law states:

“Art. 16: Ownership of mines and deposits by the State. Non-renewablenatural resources and, in general, underground products, minerals andsubstances whose nature diff ers from that of the land, including thosefound in areas covered by territorial sea waters, are the inalienable pro-perty of the State and are not subject to the statutes of limitations orseizures. The State’s ownership of the subsoil shall be exercised in -depen dently of ownership rights over the surface land co vering themines and deposits.”

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The Liberia - China Union contract shows how this general Con stitutional statementmakes its way from law to contract, confirming at the very outset of the ag reement thecountry's ow nership of mineral resources:

“A. Every Mineral on the surface of the ground or in the soil or sub-soil,rivers, water cour ses, territorial waters and continental shelf of Liberiais the property and national wealth of Liberia and all rights related tothe exploration for and exploitation of Minerals belongs exclusively toLiberia.”

Land rights and rights in minerals are two different things.

In most jurisdictions, once the company gets the necessary rights to minerals for itsmining operations, it must reach an agreement with the persons who own the landabove the deposit or have the right to use it. These persons may be the state, a privateland owner, communities holding use rights, or a mix of these.

Private or commun al landown ers may negotiate these ag reements di rect ly with themining company. In many jurisdictions, if these parties cannot negotiate a sol utionwithout the state, the state will step in and negotiate for them, or in the most extremecircumstances, may expropriate the land. These issues of land rights can be ex tremelycontentious, and are also dealt with in the "Environmental and Soci al Issues" chapter,but could easily fill their own book.

The state could develop and exploit the minerals it owns by itself, using its own resour-ces, and in some cases does. More often, the state grants licensees or contract holdersthe right to ex plore for and de velop minerals.

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C O N T R A C T A N D L I C E N S E R E G I M E S

Mining contracts and licenses are a common fea ture of mineral legal frameworks acrossthe globe. These instruments go by different names – license, mineral development ag-reement, contra cts of work, “conventions” in civil law countries - but they all serve thesame purpose of filling out the obligations and rights of the investor that are not in themining law or other re levant laws and regulations. (See the chapt er, "Laws and Contra-cts" for more information about the broader legal framework).

Some common features of contract and license regimes are described below.

Contractual RegimeIn a pure contractual regime, the primary document governing the investment is thecontract. Very few countries still have a pure contractual regime, but there are many co-untries that have mining laws yet still rely more heavily on contracts to determine mostof the state and company obliga tions.

In a contra ctual regime, the minerals law will typically have less content than a mineralslaw in a license regime. It is often a long document defining the company's obligationsand rights with some specificity. It will cover the inves tor’s obligations during variousstages of development, its rights to extract minerals and what minerals are covered,and rights and obligations with respect to infrastructure. It may also give the inves torprotections from unlawful taking of its pro perty, and will usual ly provide for special dis-pute re solution procedures. In many cases, the contracts reference and incorporategeneral law, but they can also pro vide for departures from general law. For instance, inthe tax sec tions, the contract may modify certain of the income tax rules or it may pro-vide for different tariffs. In civil law countries “conventions” or contracts will fill in holesin the law or fill out details of the inves tor’s rights, but conventions cannot free investorsfrom obligations otherwise set out in the law. Contracts can be individually negotiated,but they can also be in a standard form, with the form being updated from time totime. Indonesia, for instance, went through seven generations of model contracts ofwork before replacing them in 2009 with its present licens ing system governed understatutory law.

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36

License RegimeAlternative ly, in a pure license regime, all of the major obliga tions applicable to miningoperations are established through legislation and regula tions. Rather than signingcontracts with individual companies, the government es tablishes a sys tem for compan-ies to apply for licenses to mine particular areas of land, and those licenses are subjectto generally applicable legislation regarding taxes, royalt ies, en vironmental require-ments and so on. In this sense, companies’ licenses contain identical obliga tions.

In the chapters and sections that fol low we discuss the various obligations and rightsthat states, communities, and investors have, whether established in contracts, legis la -tion, or licenses.

37

R E C O N N A I S S A N C E A N DE X P L O R A T I O N

It all starts here. What otherwise looks like a field of grass, barren sand, or a body ofwater could have valuable minerals below the surface.

But finding those minerals is a one-in-a-hundred business. Or less, at least for gold, ac-cording to the World Gold Council: "Estimates vary widely but even the optimists re-ckon that rath er less than 1% of the prospects meet the threshold to produce a viablemine," they said in a report at the end of 2013.

So it's impor tant to get the prospecting process right.

It usually starts these days with airborne studies and mapping. Although most mineralsare found beneath the surface of the earth, a certain amount of geolog ical analysis canbe conducted by incredibly sen sitive recording of gravitational and magnetic fields.

Next comes seismic analysis - analyzing rock structures by using sound waves - andsampling, picking up rocks and analyzing their chem ical com position and density. Inthe case of "greenfield" sites - places that have never been mined before - this mustcome from on-site work. "Brownfield" sites that have already been worked may haveboth seis mic and geologic samples held by the government from previous projects.

At this point, if all the research looks good, the company will apply for an explorationpermit. The permit grants the company the right to look for minerals, but not to takethem, and is valid for a certain amount of time, say two or three years, often with a re-newal clause. The company will also have to submit work programs, detailing work and

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the bud get to be allocated to each phase of the work. From the mining company's per-spective, an exploration license will usually give the company ex clusive rights with re-spect to the designated area. Some countries impose minimum ex ploration expendi -ture and/or investment obligations. Mining codes, if they exist in a given country, willoften provide these terms, which will include a certain number of reporting obligationsby the com pany.

A contract will usually rea ffirm the right to exploration and extensions. For example,the Liberia - Putu Appraisal and Ex ploration (2005) contra ct states:

"3.1 Grant of Ex plora tion Rights: On the terms and conditions hereinprovided the Government hereby grants to the operator, during theperiod hereinafter defined, commencing with the Effective Date plusany extension of such period to which the Government may agree (re-ferred to herein as the "Ex ploration Period") the exclusive right to ex-plore for Iron Ore Deposits and appraise the ex isting Iron Ore depositsin the Exploration Area."

And the minimum expenditures will often be specified in the contract, too. This is alsofrom the Liberia - Putu Appraisal and Exploration (2005) contract:

"3.4 Minimum Expenditures: [...] (b) During the Exploration Period, theOperator shall expend not less than United States Dollars one (US$1.00) per acre during each calendar year as Exploration Costs [...]"

If the right to exploration is granted, the company will then carry out on-site trenchingand drill ing.

In some countries, the government will require a company, even at the explorationstage, to set aside a certain percentage of the company’s exploration budget to be spenton community development projects negotiated by the company, local com munitiesand local, region al and possibly nation al officials. Plus, the com pany will have to sub-mit progress reports on work carried out and money invested.

As the trenching and drill ing results are analyzed, if the situation looks hopeful, thecompany will con tinue with more and more drilling. At this point, the com pany will

Re con naissance and Ex plora tion

39

start analyzing bulk samples to es timate the size and quality of the minerals and beginpreparation of a feasibility study. The company for a large project may be spendingmillions of dollars by now, but this is still considered an early stage and the com panyhas not yet made a commerci al decis ion to pro ceed.

The crunch point comes when the ex ploration permit expires. The company must eitherinvest or give the site back to the government. A company will not give up its exclusivearea light ly. This is a strategic moment in the life of the contract. The company willneed to decide what areas it will retain and which it will relinquish.

When enough geological data has been collected, an assessment will be made: canthese minerals be extracted at a profit? Is the potential return enough to justify more re-sources going in? If not, further work will be shelved. But if the as sess ment is positive,then what was the "mineral deposit" now moves up to become, officially, an "ore body".An ore body is a mineral deposit that has economic value and may potentially be profit-able. Designation as an ore body has a particular significance to company managementand their investors.

Now the company's project development depart ment takes over. If the deposit hasbeen found by a "junior" company, it may decide to try and sell to a major. In mostcases, such a sale or transfer is permitted, though in some jurisdictions, it may be sub-ject to government approval. Prohibit ing the transf er or sale of a license entirely mayact as a disincentive for explora tion and production. (This issue of transfer is addressedagain in the chapter, "Planning for Trouble").

Very few finds, as we have seen, have the poten tial to become profitable mines. Be-cause it's not just enough to find stuff. Stuff is, broadly speaking, everywhere in ageolog ical sense. Take iron ore. In 2012, about two billion tonnes of iron ore were extra-cted. That seems like a lot. It is a lot, in fact. That amount of iron ore would fill out abouthalf the volume of Mount Everest. But it turns out that iron is the fourth most com monelement in the Earth's crust, accounting for about 5% of a rock formation which is rarelyless than 5 km deep (in the oceans) and often reaches as deep as 50km. That is, in fact,millions and mill ions of Everests. So what determines which tiny fraction of that irongets extracted? Cost and convenience. Of all that iron, only the tiniest fraction is com-mercially extractable.

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Miner al ex ploration is a throw of the dice. You don't know until you throw the dice andput your money on the table, what will come up or what you will find, and whether youwill lose or win. The uncer tainties and costs associated with mineral exploration are abig part of the challenge faced by host governments in pro moting development of theircountries' mineral resource endow ments.

The diagram below illustrates the process of getting to a mine, which is described ingreater detail in the next chapter.

41

F E A S I B I L I T Y

In a hypothetical world, which could be your own backyard, your metal detector sug-gests you are stand ing on top of a major gold find.

You are ecstatic. All you need to do is dig the gold out of the ground, run it down to thelocal gold buyer (lots of them around today), take the money and run to the bank.

Time to dig the gold out of the ground. You've spent the whole morning di gging andsweating. You are now down six feet, still no gold, and the ground has become too hardto dig with a shovel. Maybe you are digging your own grave, but you will not give up.You go down to the local hardware store and rent a jackhammer. Now you get busy,shake, jump, shake. This is great. You're generating lots of rock. Uh oh, how are yougoing to get it out of the pit? Back to the hardware store to rent a winch and some buc-kets, but who will operate the winch? There's Joe; he's ag reed to help you out for a pieceof the profits. Back to the pit. Deeper and deep er you go; the waste pile is building up.Joe says there's no more room to put the stuff. Out you come and down to the equip-ment rental shop to pick up a truck and a mini-front end loader. This is beginning to getexpensive. You take the time to haul away the waste and dump it at the dump. Oh no,the city wants you to pay for dumping the gunk. Back to the pit to continue drilling andtaking out the waste. Now you are down to 15 feet and the sign al from the metal detec-tor is getting strong er. One more foot and the detector is going wild. There it is - an oldgold watch band. Well, it looks like gold. Now off to the gold buyer. It's real 18 caratgold! What? Only $500? After Joe takes his cut, and you return all the rental equipmentand pay everybody off, you are now $500 in the hole. This was not what you expected -the shovel alone could not do the job; you needed a drill to break up the harder rock;you had to set up an electric winch to get the waste out, then trans port the waste to the

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dump - none of this was anticipated and it all cost money. Finally you had to pay off Joeand the gold buyer took his cut too. The return certain ly did not justify the effort.

Maybe you should have taken a break at six feet, and figured out all the extra tools andequipment that you might need, and what it might cost you to continue digging. Youcould have chec ked out your bank account and decided how much money you werewilling or able to put at risk. You would never know until you got to the "gold" howmuch there was and whether it would be worth all the money and effort.

Back to the real world.

T H E F E A S I B I L I T Y S T U D Y

There are many un knowns that need to be investigated in order to come to a reasonedconclusion about whether developing a mine makes sense. Mining profitably and re-sponsibly today poses many challenges. Apart from questions of the quality and quant-ity of the mineral, how to get it out, and how the market is doing, there are cost, in-frastructure, soci al, environmental and polit ical risks. As sessing these issues and un-derstanding the risks and opportunities are central to the feasibility study process.

A feasibil ity study - which may be preliminary or full - must consider a wide range offactors and condi tions. If you take just one key technical area, geology, some of thequestions that will need answers include, but are not limited to: what does the depositlook like? what is the chemical composition of the ore zone? what are the characteristicsof the waste material? how much of the material can be classified as reserves? what areits possible min ing options? how much of the ore material can be recovered from themine (given that a certain amount will be left behind)? are there any seismic risks? whatis the strength of the rock? what does all this mean for the design of pit slopes, un -derground openings, waste dumps, leach pads, and tailings dams? where is the watertable? how does groundwater flow? where does it come from? and where are the aquif-ers located?

The mine design, processing or upgrading requirements, and the marketing approachare dependent on the type of mineral that is being mined and how it is deposited in oron the ground. Whether it is a fuel mineral like coal or uranium; an industrial mineral

Feasibil ity

43

like salt, kaolin, potash, titanium dioxide, metallurgical coal; a base metal like copper,zinc, lead, tin; a ferrous metal like iron ore, tungsten, manganese; a preci ous minerallike gold, silver, platinum, diamonds and gemstones: their depositional characteristicswill determine how they are mined, proces sed and marketed. For example, alluvial goldmay be mined using placer or hydraulic methods, while gold in quartz veins may needto extracted mechanically from the ground, crus hed and then pro cessed using grav ityrecovery, mercury amalgamation or cyanidation methods to strip out the gold.

In the case of certain polymetallic ores, for exam ple a nickel-copper-cobalt ore, the orewill have to be mined and concentrated, the concentrate smelted to recov er all of thepayable minerals. While nickel may be the main product, the copper and cobalt may bevalue add ing co- or by-products, depending on the extent to which they contribute tothe revenue stream. Depending on the market value of the mineral, it may be sold asrun of mine ore, as concentrate, or as a metal matte or refined metal. Whatever themarketable product is, and depending on the ex tent of the pro cessing occurring at themine, the product may need to be stockpiled or warehoused until such time as enoughmaterial has been ac cumulated to meet the IMC's sales commitments, or until trans-port conditions permit it to be sent out. Again depending on the product's characteris-tics and the proximity of the mine to port or final market, it will either be trucked orrailed out, shipped out, or flown out to get it to the buyer(s).

Much of the in vestigation of the ore body has to be done remotely, through drill holesampling. But there are no guarantees that you have correctly characterized thegeology, the ore, the waste, the hydrogeology, etc., until you actually develop the mineand get into the ore body. This will not happen until after a "go" decision has beenmade, the mine constructed, and the ore body opened up or exposed. That could stillbe ten years down the road.

This is why the feasibility study pro cess is so important and often lengthy. Once the pro-ject is turned over by the geolog ists to the project development (study) team, a more in-depth and detailed study of all the technical, legal, market, soci al and environmentalaspects of the project will begin. There are typical ly two phases to this study – a pre-liminary phase (which becomes the preliminary feasibility study), and a final phase(which results in the final feasibility study). Attached to each of these phases are decis-ion points which provide the company with an opportunity to review what is knownand what is still not known, what the critical risks are that still need to be addres sed,

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and whether there are any “show-stoppers.” At either of these decision points, the pro -ject team with the senior management will have three choices - (1) decide to shelve theproject, (2) decide to do some more studies of items that need to be better understoodor (3) decide that enough is understood and known at that stage to move on to the nextphase. In the case of the prefeasibility study, the next phase is the com pletion of a muchmore de tailed final feasibility study. In the case of the final feasibility study, the nextphase is project implementation (final detailed engineering and construction).

The Model Mine Development Agreement (MMDA) sets out the major elements of afeasibility study. It states:

"2.4.1 ... The Feasibility Study shall include [elements as the part ies mayagree, such as the follow ing]:

(a) An estimate of minable reserves in accordance with internationallyaccepted stan dards;

(b) A market study for all of the Minerals to be produced in the MiningArea;

(c) An evaluation of the known deposits within the boundaries of theMining Area, as well as the Minerals which can be ex ploited in the pro-ject facilities;

(d) A description of the technology process to be used in each case, withthe results of any laboratory or other tests designed to identify tech-nologically appropriate methods for processing the ore or ores in vol-ved;

(e) An initi al mine plan indicating expected recovery rates;

(f) A general description of requirements associated with obtaining re-quired permits, including the estimated cost of compliance and im -plemen tation of the environment al Management plan;

(g) A description and plans of the area of the project facilities, includinga list of the main structures, machinery and equipment to be used,specification of raw materials and services (including electrical require-

Feasibil ity

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ments and water);

(h) An organization chart and re quirements for personnel;

(i) Schedules to initiate construction and con struction timetables;

(j) A description and generalized plans for all infrastructure and as -sociated facilities (such as power, communication, trans portation,roads, and fresh and reclaimed water), in cluding a list of main items,structures and raw materials, and an as sessment of the potential forsharing such infrastructure with other users in ways that promote sus-tainable development of the communities in the project Area;

(k) Plans for electricity supply for Mining operations, including reliabil -ity and cost of services that includes an as sessment of the potenti al forsharing electrical supplies and infrastructure with other users in waysthat promote sustainable development of the communit ies in the pro-ject Area;

(l) Plans for disposal of tailings from the ore pro cess ing plants and ofwaste rock and materials from Mining operations;

(m) A description of plans for any potential reprocessing of materials ortailings;

(n) Estimates, accurate to within fif teen percent (15%), of capital costsand operation costs;

(o) An economic evalua tion and financial analysis (estimated rate of re-turn of the investment and cash flow for the various phases of the ex-ploitation), including pro bable future capital investments and com-ments on the fin ancial viability of the exploitation;

(p) to the fullest ex tent reasonably practicable, detailed proposals withrespect to any beneficiation or further processing of Minerals pro posedto be car ried out by the Company within the State; and

(q) The estimated date of Com mencement of Com mercial production."

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It is during the final feasibility phase that the pre ferred mine design and operating opt-ion is optimized, the social and environment studies are com pleted and im pact man-agement plans finalized, that all permitting is underway, that any ag reements withgovernments and com munities are being negotiated and finalized, that the marketniche has been defined and buyers lined up; that equipment has been selected and itsspecifications prepared for tendering; that all critical infrastructure needs have beenidentified and terms of construction and operation negotiated; that there is now en-ough detail and information to develop good cost and revenue es timates. These es-timates will need to include any taxes that will have to paid to the government, as wellas the costs of any ad ditional community invest ments, local business developmentplans, and infrastructure development, or other projects and programs agreed on withthe government, or the local communities. Only then can the calculation be made, as towhether the benefits of mining the deposit will outweigh its costs, and whether the pre-dicted returns to the in vestors, the government and the communities are enough tojustify the mine’s con struction and operation. And even then the numbers used are onlybest estimates, based on the technical, marketing, taxa tion, and other decisions takenor negotiated.

Some years ago, a study was undertaken to try to understand why so many pro ducingmines, which had been subjected to full feasibil ity studies, were still facing serious op-erating problems.

Of 18 projects reviewed, only four were found to be unqualified successes. Five were stilloperating but with net negative cash flows, and the remain ing nine had serious pro-blems reflec ted in cost overruns, construction delays, and their re duced pro ductioncapacities. There were design issues relating to water, metallurgy, equipment, groundcontrol and even the mines' remote locations. There was labor unrest, and lower pricesand pro duc tivity than predicted.

Over time, estimating techniques have im proved and the level of due diligence and thecare with which feasibility studies are undertaken have increased. With the dramaticescalation of costs over the past decade, the feasibility study has taken on even greaterimpor tance. We are no longer talking just about mill ion dollar investments. "Mega-projects" - a term of art used to de scribe a pro ject that requires over a billion dol lars in-vestment - are now common across global min ing.

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The list of risks has also changed over the past decade. Ernst & Young, which pro ducesan annual re view of mining, now lists as project-related threats such factors as capitalrequirements and allocations, resource national ism, the social license to operate, skillshortages, price and currency volatility, and escalating costs. There are increas ing de-mands on a cash- and skill-constrained industry to share more of the pie. Governmentswant a bigger take. Communities demand greater investments, and the public at largepay close attention to environ ment al and social sus tainability.

When all is said and done, and the decision is made to move to construction, thefeasibility study provides the optimized blueprint for the development of the mine: itwill describe where mining operations are to be conducted; if there will be multiplephases for mine construc tion; what area will be mined first; whether rail, road, andpower infrastructure is needed; it will indicate preferred routes; and provide the mostaccurate estimates of costs and timeframes for construction possible without more de-tailed engineering; it will project labor and employment needs, define mine-site ser-vices required, lay out environmental safeguards, com munity issues and mitiga tionmeasures, and so on.

It is the benchmark document for completing the detailed engineering design, cost es-timates, pro curement pro gram and schedules that will allow for the start of construc-tion and guide its completion.

But even if a full feasibility study looks good from the company's perspective, the ques-tion is whether the government is also on board.

T H E G O V E R N M E N T P E R S P E C T I V E O N F E A S I B I L I T YA N D D E V E L O P M E N T

Many governments require the company to provide its feasibility study and all dataused in it to the government. While sometimes the com pany will retain ow nership ofthe feasibility study, in other cases the company will have to transfer ow nership of thestudy to the govern ment.

The recently negotiated (August 2011) Mineral Development Ag reement between Li-beria and a consortium of companies operating in the Western Cluster area illustrates a

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requirement for the company to dis close its pre-feasibility analysis:

"4.6 Pre-Feasibility Study: [...] the Pre-Feasibility Study for the BeaMountain Deposit will be completed and a copy provided to theGovern ment no later than the third an niversary of the Effective Date, itbeing understood that the Pre-Feasibility Report will be provided for in-formational purposes only and not subject to approval by the Govern-ment."

Similarly, Article 2.4. from the MMDA quoted above requires the company to discloseits feasibility study to the government prior to beginning construction on the project.

The government's need to review the feasibility study can be a major burden on agen-cies with li mited staff and resources. These studies may be thousands of pages long andare supported by technical studies based on sampling methods with which only special-ists may be familiar. Sometimes, the government is ef fectively in a position of hav ing todepend on the professionalism and competency of the company.

Nevertheless, the ability to ac cess the informa tion is crucial. As is being able to trust init. To address that issue, in addition to detailing the contents of a feasibility study,contracts might also impose requirements regarding who prepares the analysis. Ar ticle2.4.1 from the MMDA quoted above, for instance, requires the feasibility study to beprepared by "(i) an independent third-party or (ii) by the Company and verified by an in-dependent Sole expert, on the basis of sound engineering and economic principles inaccordance with good in dustry practice."

Once a project is approved and moves to development, the government becomes theregulator, en forcing min ing, health and safety, environmental and fiscal controls, andensuring complian ce with the terms of the mining contract.

Many different agencies are now involved. The Environmental Protec tion Agency wouldtypically review and approve the Environmental and Social Impact Assess ment (ESIA),the Environ mental Man agement Plans (EMPs) and the reclamation or closure plan. TheMinistry of Labor approves training, recruitment and employment plans. The PublicHealth Agency approves design plans for clinics and health facilities. The Ministry ofCivil Works oversees road, township, water sup ply and sanitary systems. And so on. Ifthe co untry has a min ing cadastre unit or agency, it will be involved in recording claims

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and handling applications for ex plora tion permits, and possibly in the conversion of ex-ploration to mining licenses. The mining permits may be authorized and issued by theMinistry of Mines, signed off on by the Minister him or herself.

B U M P S I N T H E R O A D

Should we start digg ing?Remember our backyard gold mine at the beginning of this chapter, when we wentthrough all the effort to dig up the gold and at the end of the day we lost money? Even ifwe found a bit more gold, enough to cover our costs, the eventu al profit was not worthall the time and ef fort (not to mention the fact that our backyard is now just an unsight-ly hole in the ground). Either way, that mine is not commerci al, regardless of whetherthe govern ment was going to tax it or not. This could certainly be the case for a mineraldiscovery, and all the study up front is the way companies seek to minim ize the risk ofthis happen ing.

But we didn't even look at the taxes. The situation is more dif ficult when we throw thatinto the mix. Let's as sume our mine turned out to be quite full of gold in the end, andwe stand to make a good pro fit before taxes. But the government has a law that re-quires it to take 90% of our net profits. For al most any miner, backyard or otherw ise,that mine is not commercial either, at least not as long as the government is going totake this deep cut of the profit.

In a real world scenario, a miner may come to the government to discuss chang ing thelaw that demands an otherwise profitable mine to be uncommercial.

In a contra ctual system, there may be room to negotiate this mine. And if the 90% tax isunreasonable, this might provide an opportunity to agree on something lower, whereboth the government and the company stand to gain from the mine going forward.

The feasibility study will certainly be necessary. More know ledge, for both parties,should mean fewer uncertainties and therefore a quicker, more efficient negotiation.

Maybe so. Maybe the geologic studies and economic analysis clearly show a world class

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deposit that, under many price and cost scenarios, looks good and will be com mercialunder the current tax system in the law or model contract.

But maybe not.

The negotia tion of the mining contra ct can become a long and ardu ous process inwhich the government still knows relative ly little about the assets it has. In thesescenarios, a government might hear a common refrain from its com panies: the mine iseconomic, but only if there are just a few necessary changes to the model contract.Govern ment negotiators will hear this over and over again.

If there is the opportunity to negotiate a lower tax or royal ty rate or any other paymentto government, any rational company would take it. If there is an argument that theproposed arrangements in the model agreement are uneconomic, then a companywould not be irrational to negotiate terms that made the mine economic under eventhe worst scenarios (though a forward-looking miner might be cautious about signing adeal that is "too good to be true", anticipating government dis satisfaction and potentialconflict down the road). The company will want to make sure its equivalent of the bac-kyard gold mine is still profitable after it has incurred the costs of getting the gold out ofthe ground, to market, and paid the government its shares.

But the government will want to be sure of some th ings as well. Its job is not to bendover backwards, but to maximize the total benefit to the co untry. Correction, the totalNET benefit. This is a key concept. Mining comes at a cost.

The feasibility study is thus the key here.

What can governments do? What can companies do to try to avoid lengthy negotia-tions, just at the point that a mine looks possible?

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Disagreements and De laysEven if there is not a discuss ion about whether the mine may not be economically vi -able under the taxation system currently in place, the government and com pany maynot be alig ned on other is sues. Maybe the government prefers a certain rail or roadroute; or it is concerned about moving communities; or there is a desire to use thepower plant that will supply the mine to also supply nearby areas. There could be anynumber of concerns from a variety of agencies. This may or may not be part of formalnegotiations; it can arise under any sys tem.

It is not uncommon to see time frames in which the government must either respond towhat the company has submitted or it is deemed approved. The Model Mining De-velopment Ag reement provides an ex ample:

"2.4.5 Com pliance with Law; Requested Chan ges by the State. The Stateshall cause its appropriate agencies to review the Documents as pro -mptly as reasonably possible after receipt and to provide com mentsthereon to the Company of any failure to conform to Applicable Law orto the terms of this Agreement. The Company shall correct any failuresto conform to Applicable Law or to the terms of this Agreement, orshall submit the matter for resolution pursuant to Section 32.2. If theState does not pro vide comments of any failure of the Documents toconform with Applicable Law or to the terms of this Ag reement withinone hundred eighty (180) Days after receipt of the Documents, theDocuments shall be deemed to have satisfied the requirements of thisAgreement, provided that the foregoing shall not relieve the Com panyof its obligation to comp ly with Applicable Law."

There may be permits needed before construction and operation, as part of generallaws on busi ness, health, safety, labor or others, at the local or national level. This maybe handled in the contra ct as is pro vided in the Model Mining Development Agree-ment:

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"2.5 Requirement to Obtain Permits: Where the Company is requiredunder this Agreement or Applicable Law to obtain a permit, license orapproval, the Company shall obtain the neces sary permit, li cense ofapproval from the appropriate State agency (including Local Govern-ment) prior to proceeding with or undertaking the activ ity authorizedby the permit, license, or approv al."

Any number of external events could also slow down the pro cess. New laws may causethe com pany to make a new as sessment of the viability of the mine. Community pro -tests could result in local opposition. Dramatic changes in price could cause a re-evaluation. Natural disasters could strike.

"Con struction!" or "Construc tion?"A company may not always be in a hurry to conduct operations, particularly if thatphase is expensive, like explora tion and construction. It might pref er to use its funds onanother project, or not at all. A company may need to raise funds, or just want to bideits time while a par ticular commodity price recovers or the political winds change. Amining contra ct has a value as an exclusive right or option to conduct the various min-ing activities discussed so far. This exclusive right is valuable in and of itself to a com -pany, as potential prospects are limited and keeping a competitor off a piece of land isan advantage unto itself. The company will not give up that right easi ly. Sometimes tak-ing things a little bit slowly seems like a good strategy.

For these kinds of reasons, governments might include a firm obligation for the com-pany to start development of the mine once all other activities have finished. After allthis time, the government will be keen to start collecting its share of the revenues, toemploy its citizens, and generally to start reaping the benefits it has determined itstands to reap.

Take the Model Mine Development Agreement article 2.6 on Construction:

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"(b) With in 180 Days after the last to occur of (i) the Com pany's receiptof all permits required for construction of the Pro ject and (ii) the Com-pany's submittal of the Documents, the Company shall commence anddi ligently continue construction of the Project until its completion inaccordance with the Feasibil ity Study and any non-material changes re-sulting from engineering and other studies conducted by the Com panyafter completion of the Feasibility Study."

Even with language like this, when prices of a commodity crash or political winds chan-ge, it will be hard for a government to convince a com pany to keep calm and carry onwith construc tion. At the end of the day, convincing a fundamentally economicallymotivated actor like a company to conduct uneconomic activ ity is well nigh im possible.

Yet there are still good reasons to include this sort of language. If the delay is not ageneral mar ket price crash which is expected to end ure and that would keep almost anycompany from mining the deposit, but an issue unique to the company (e.g., a shortageof cash due to bad management, perhaps) the government may be able to ter minatethe contract for a failure to undertake this obliga tion. Sometimes the obligation is en-forceable with specific fin ancial penalties rather than termination. This avoids the "all-or-nothing" approach. A strong contractual provision might be the difference between acompany decid ing to delay operations in Country A instead of operations in Co untry B.

A contract might also require the submiss ion of a construction plan to the government:

"(a) [...] the Company shall submit to the State a detailed schedule forthe performance of all planned activit ies during the con struction per-iod if such schedule is not included in the Feasibil ity Study. The Stateshall have the right to com ment upon and re quest explanation of suchschedule and any changes that occur in the schedule."

This language from Article 2.6 of the MMDA addresses construction that is not con-templated in the feasibil ity study, and illustrates one of the cross-cutting themes of thischapter: the company provides a plan or report or study to the government, and thegovernment then must review and approve or ensure it complies with law.

Ultimately, the mining contra ct or code can be viewed as a series of proposed plans for

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every phase of operations from the company to the government. Not so much the re-sult of a negotiation, as the framework for a permanent and continuous negotiation.

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P R O D U C T I O N

After the mine, in cluding any process ing facilities, has been constructed, when the sitehas been cleared, access roads put in place, surface facilities erected (pro cessing plant,water and organic waste treatment plants, maintenance garages, warehouses, offices,camp accommodations, etc.), trans mission lines, water lines, slurry (tailings) pipelinesand pump stations installed, waste and tail ings sites and dumps pre pared, surfacedrainage and water control systems put in, overburden stripping commenced and thefirst cut of ore exposed, or the shaft or decline ex cavated and the development driftsdriven to the ore body, extraction of the ore can comm ence. The amount of materialfirst pulled out will be less than the targeted/designed production rate, and there willbe a gradu al ramp up to full capacity, as more ground is opened up.

During ramp up, the company may already have a full com plement of technical, pro-duction, maintenan ce and camp and mine administrative staff on site, from minegeolog ists and engineers (planning, environmental, blasting, ground control, ventila-tion (if underground), safety, civil, mineral processing, mechanical), to skil led trades-people (electricians, plumbers and hydraulic tech nicians, engine mech anics, metalworkers), to equipment and plant operators and other skilled labor, to supervisors, as -sorted unskilled labor, to support staff (medical staff, commun ity relations, human re-sources, accounting, informa tion technology, mine site security among others), manag -ers, and others, or may still need to finish staffing up. Many workers and pro fessionalsmay be housed on site for logistical and operating reasons. The mine may operatearound the clock, although in some cases, the mine may only run two shifts with thethird reserved for maintenance.

At some point, if all goes according to plan, the mine will reach and be able to maintain

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production at its plan ned monthly (daily) rate. Materi al is fed to the mill (mineral pro-cessing plant), which will either recover much of the metal di rectly or pro duce a con-centrate. Whether the mill meets its scheduled/planned pro duction of metal or con -centrate depends on the ability of the mine to provide material that meets the mill'squantity and quality criteria.

The right people are in place, all the equipment is there. All systems are go. Productionis humming along. At long last, your mine is constructed and the production phase hasstarted. Now you can sit back, relax and have 30 years of production.

As one might guess, it probably won't be that sim ple. There are a large number of pos-sible interruptions to production, and related issues which may arise.

The processing plant can fail to achieve its planned metal recovery rate or concentrategrade, and may need to be fine tuned.

Planned mine productivities may have been overes timated and the mining system andapproach refined, or equipment changed out or blasting patterns and loadingsmodified, and so on. Tailings containment dams can leak and contaminated waters canescape.

Even before the point of full production is reached, the mine will reach the productionrate that meets the criteria set in the contract for commer cial production, which mayrange from 60 to 85% of the mine's production at full planned capacity. De pending onthe configuration of the mine, commercial pro duction will be tied either to mine or pro-cessing plant production.

Why would there be a minimum pro duction criteria in the contract? This is to ensurethat the mining com pany continues to produce ore even if its own business strategymay dictate otherwise. If a company has a number of iron ore mines across the globe,and one is not performing as it wishes, it might put that mine on care and maintenan ce.It may do so even if the global price for iron ore is, overall, quite good. Because of the re-venues it will lose due to decreased pro duction, the country would not want to see itsmine production decrease in an otherwise beneficial market for iron ore. Hence theneed for pro duction minimums.

During ramp-up and then during steady state produc tion, it will be in the interest of

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both the mine operator and the government officials charged to monitor the pro ject tomaintain regular communica tion. Inspectors from the government mines inspectorateor from the Ministry of the Environment should make regular visits to the site. Re-lationship maintenance and communication between the mine/ company and thegovernment and bet ween the mine and surrounding com munities will be es sentialthroughout the production period.

If the mine is part of a horizontally or vertical ly integrated mining and processing busi-ness, the mine may be a cost center only. This has implications for how fiscal terms andtaxation are assessed (discussed in the next section of the book), but will also have im -plications for how the mine is operated and associated infrastructure requirementsmet. During the operating life of the mine, the IMC may continue to explore for nearbyor contigu ous extensions of the ore body, which could extend the life of the mine or re-sult, depending on market conditions, in pro duction capacity ex pansion. In either case,there may also be implications for new approvals or amendments to existing agree-ments or licenses.

In the best of operations, the mine operator will begin to reclaim disturbed areas duringthe mine's operat ing life and not wait until the mine reaches the end of its life and is de-commissioned. This is called pro gres sive reclamation. This may be managed by the op-eration or contracted out to local or national businesses.

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C L O S U R E

In a nutshell, the closing of a mine is the process during which the com pany dismantlessome of the infrastructure and equipment that has been used to carry out the miningop erations and engages in environmental remediation tasks. It is what ultimately de-termines the environmental impact and much of the social impact of the mine. This“nutshell” includes extensive and complicated proces ses that require considerable in-vestment and rigorous control. The closure stage, like the others, can be risky andvolatile if careful planning has not been done.

In most cases, companies negotiate the general contours of their closure obligations atthe time of the negotiation of the mining contract.

The details that must be included in a closure plan will be specified in the miningcontract or in the mining law in a license regime, or a bit of both. Then, as closure be-comes a more pressing matter, the company will need to submit an updated plan thatis more and more specific periodically.

Article 26 of the Model Mining Development Agreement provides a good example ofsome parts of this process:

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"26.1 Closure Plan and Closure Obligations: (a) The Company shall pre-pare and deliver a closure plan to the State pursuant to Section 2.4(e) ofthis Agreement (“Closure Plan”). The Closure Plan shall address theanti cipated en vironmental, soci al and economic state of the ProjectArea during the next five-year period of Mining Operations, and shallbe prepared in Consultation with communities in the Project Area. Itshall be consistent with any Community Development Ag reements,and prepared consistent with guidance pro vided by the Planning for In-tegrated Mine Closure Toolkit and related guidance published by theInternational Council on Mining and Metals. The Closure Plan shall beupdated through the same process by which it was prepared each timethat there is a substanti al change in Pro ject operations. In the eventthat no such updated Closure Plan has been submitted for five (5)years, the Company shall deliver an updated Closure Plan on the sixthanniversary of the last such submission.

(b) The Com pany shall, after Consultation with communities in theareas affected by Mining Operations, deliver to the State a pro posedfinal Closure Plan not later than twel ve months before the planned endof the Commercial Pro duction. After review and comment by the State(with or without modifica tion), the Company shall deliver the finalClosure Plan to the State by the planned end of Com mercial Produc -tion. The final Closure Plan may be amended by ag reement betweenthe Parties, during the performance of closure activities, at the requestof the Com pany or the State, subject to any approval required byApplicable Law."

The closure obligations do not end with the submission of a closure plan. The com panyhas to continue to ac tually implement that plan. This is what that obligation looks like:

"(c) After cessation of Commercial Production, the Company shall con-tinue to perform the required environmental man agement of the Pro-ject Area as set forth in the Environmental Management Plan and thefinal Closure Plan."

And further more, the company has to update the Government on its progress of im-

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plementation:

"(d) After cessation of Commercial Production, the Com pany shall pro-vide to the State every 180 Days (or such alternative period as may beag reed by the Parties from time to time) a report explaining pro gress inthe implemen tation of the final Closure Plan."

Lastly, the Government will need to inspect the final closure and certify that the com-pany has ful filled its closure obligations:

"(e) Upon completion of the final Closure Plan, the State shall inspectthe Mining Area and provide the Company with Notice as to whetherthe Company has completed closure in accordance with the finalClosure Plan."

What if the government is worried it might have a com pany that will not fulfill theseobligations? A company that will take its profits and run after production has run out?What can the state do to protect itself?

The sol ution that most contra cts and laws use is to require the company to pro vide afinancial guarantee. Generally, in non-technical terms, a financi al guarantee is moneythat is set aside to ensure that an obligation is met. The money can be accessed by theother party that benefits from the obligation of the com plying party, in this case closureof the mine. If the obligation is ful filled, the financial guarantee is returned to the partythat provided the guarantee and ful filled the obligation:

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"26.2 Guarantees for Closure Expenses: The Company shall withinninety (90) Days of the Effective Date, pro vide a mine closure guaran-tee to the State. The purpose of this mine closure guarantee is to ensurethe completion of the Company’s Closure Plan.

The mine closure guarantee shall be in an amount cal culated to benecessary to implement the Closure Plan should the Company fail toimplement the Closure Plan during the five-year period covered by thethen current Closure Plan. The amount of the guarantee shall be up-dated any time the Closure Plan is updated, or with the five-year up-date of the Closure Plan under Sec tion 26.1, so that it continues to besufficient to ensure that all steps in the Closure Plan can be completedin a satisfactory manner should the Com pany fail to implement theClosure Plan.

[...]

(d) The State shall return to the Company the full sum of the Com-pany’s mine closure guarantee within [X] Days following verification bythe State that the Company has fulfilled all the obligations of the finalClosure Plan. [...]"

The Model Mining Development Agreement suggests further monitoring by the localcommunity:

"26.3 Post-Closure Monitoring: The Company shall in Consultation withlocal community leaders, develop and implement a post-closuremonitoring committee, with the mandate to super vise the monitoringof geophysical stabil ity, water quality, and rehabilitation of con-taminated sites and restoration of land for post-closure use. The post-closure monitoring shall take place for a period after the cessation ofCommercial Production, the length of which shall be agreed in theClosure Plan."

One issue which can arise is the ability of the government to properly monitor and ver-ify the company’s complian ce with its obliga tions. This will frequently require technicaland monitoring capacity which the government and its regulatory agencies lack. When

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negotiating the closure terms and cost, the government's capacity for oversight of theprocess should be taken into account, and if required, the costs should include fundingof technical expertise for the government or the provision of third party verifica tion andoversight.

One final issue may be the infrastructure as sociated with the mine being closed. If theinfrastructure is public use, there may be a pro vision that allows the government to takeownership of that infrastructure and the responsibilities associated with it at the end ofthe mine's life.

F I S C A L I S S U E S

M O N E Y M A T T E R S

F I S C A L R E G I M E S

S P E C I A L C H A L L E N G E S

H O W T O S P E N D I T

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M O N E Y M A T T E R S

Let’s face it: most taxation regimes are complex and opaque. But it is taxes that fund theschools, housing, roads, rail and power. And at end of the day, it is what the govern-ments and the companies care about.

B A C K T O T H E B A C K Y A R D G O L D M I N E

Remember that goldmine you thought you found in your backyard back in the last sec-tion, "Mine Operations"? Let's think back to that for a minute.

That gold was so hard to get out of the ground, you went $500 in the hole just trying toget this stuff out of the ground. Even without taxes, it was not worth doing. It wasn'tcommercial ly viable.

But maybe you stopped searching too soon. Maybe it wasn't a gold watch after all. Yoursecond round with the metal de tector seems to indicate there's real gold down there.New technology makes it easy to get out of the ground. Maybe now it only costs $1000an ounce to get out of the ground and to market, whereas before it cost almost $1700an ounce.

With gold prices currently at $1200 and costs only at $1000, you get $200 an ounce inprofit. When you sell your gold for $1200 an ounce, you'll make $200 profit. It is worthgetting the gold out of the ground after all.

The government, however, will want to share in your $200 of profit. If it has a fiscal sys-tem that takes nearly 90% or more of your $200, maybe spending that $1000 to get

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that ounce of gold out of the ground seems like a risky proposition--too risky in fact.Your once profit able mine now looks pretty bleak. Your backyard gold was com mercial-ly viable, but the in troduction of sharing revenues with the government has renderedyour backyard mine un economic. It may seem quite obvious though it bears re-stating:companies will not un der take a project if there is little to no possibility of making a pro-fit from it.

Because the government will also benefit from the exploration and development of amine, it may negotiate its “share” in the profit in order to make sure you will still exploreand develop the resour ces. This government may need to do that, or maybe not. Wecannot know with just this information in this highly simplified and stylized exam ple.

This hypot hetical does cap ture the nature of the commer ci al as sessment of a miningoperation. Is it feasible to make a profit from this deposit? Then, if you take off thegovernment's share of that, is it still profitable?

Let's go back to our example and assume you de cide to create your own mining com-pany, Bac kyard Goldmine Co.

Your company has the expertise and knowledge about how to get the gold out of theground and sell it. But the government owns the gold your company needs. The Bac-kyard Goldmine Company is going to have to pay the government for that gold. It is apartnership, if perhaps one that feels a bit forced at times.

Most governments will probably want to levy a royalty on the value of the gold beforethe deduction of costs. And it will want to receive corporate income tax from profits inaddition to this royalty. It might want a bonus when your first shipment of gold goes tomarket. These different pieces, taken together, are how the government receivesmoney from the goldmine. They are commonly cal led "the fiscal regime".

To understand a state’s mining fiscal regime, and to assess its effectiveness, one mustfirst understand the multiple ways in which a state can extract revenues from a miningproject. The principal “revenue tools” in a "fiscal regime" are:

royalties

income tax

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excess or windfall profit taxes

resource rent taxes

signing bonuses and miles tone payments

equity participa tions in the mining company

taxes on gains from the trans fer of interests in the mining company

withholding taxes on certain payments made by the investor

import duties and VAT levied on imports and purchases by the inves tor

land or “surface” rentals

Each of these components of state revenue is dis cus sed more fully in this section.

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F I S C A L R E G I M E S

When it comes to revenue tools, not all are created equal. Or even equivalent. Or eventerribly similar. They are quite different in the way they are calculated, the function theyserve for policy purposes, and how difficult they are to collect. Simply put, a 5% royaltyis not equal to nor equivalent to a 5% tax. And as we'll see, even one 5% royal ty may notbe equal to another 5% royal ty.

Why is this the case?

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There are many reasons, but one of the primary reasons is that different fiscal tools areapplied to different bases. Mathematically, 50% of 100 (50) is bett er than 100% of 5 (5).Or as the ancient proverbs have said, a half of a goat is better than a whole chicken.

This chapt er will illustrate just how different the various revenue tools are.

The two most important mineral revenue components for most governments areroyalties and in come tax, and this chapter considers them first and in the greatest de-tail. In almost any country in the world, Bac kyard Goldmine Co. is going to be subject tothese revenue tools.

R O Y A L T I E S

We'll start with royalties. They are among the most common and sim ple of the revenuetools.

Royalties Measured by Product ValueRoyalties are most commonly based on the value of the extracted mineral products. InLatin, the revenue tool goes by the name “ad valorem”.

Let's return to our backyard gold mine. The royalty rate in the co untry where BackyardGoldmine Co. is min ing the gold is 5%. The value of the gold is $1200 an ounce. If oneounce of gold is extracted and sold, the govern ment will take 5% of $1200, so BackyardGoldmine Co. (nickname: BGC) will pay the government $60 as the royalty pay ment.

Under an ad valorem system, as the price of a mineral rises, the royalty that goes to thegovernment will too. So under that same 5% royalty applicable to Bac kyard GoldmineCo., if the price of gold goes back up to $2000 an ounce, the royalty payment that BGCwill make to the Government will shoot up to $100 per ounce. Why? Because 5% of$2000 is $100.

What does this language look like in contra cts? Here is an example from Mongolia -Oyu Tolgoi (2009), Ar ticle 3.13:

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"The Investor shall pay a royalty under Article 47.3.2 of the Minerals Lawat the date of this Agreement equal to 5% (five percent) of the salesvalue of all Products mined from the Contract Area that are sold, ship-ped for sale, or used by the Investor. [. . .]"

Hopefully, so far, so good. The royal ty cal culation is pretty straightforward as revenuetools go. Now for a bit more complexity: how is value to be established?

This question has two separate aspects: (1) at what point in the mine-to-market processis value to be measured, and (2) does the measurement at the selected point rea lly es-tablish the “value” of the mineral invol ved?

One way to minimize the valua tion problem and to simplify administration is to use aninternational reference price for the value of a mineral, such as the London Metals Ex-change or other published market price. The price of gold is a good example of exactlythis kind of international reference price.

Contracts regularly refer to these international reference prices in order to have a valuethat is in dependently established by the market. Take the gold contract, Afghanistan -Qara Zaghan (2011):

"Article 8. After the start of commercial production and based upon asolar calendar [Company] agrees to pay, monthly, to the [Ministry ofMines], royalties at the rate of twenty six percent (26%) of the gross re-venue from sale of gold at a price set on the date of sale by the LondonMetals Ex change for each sale of gold. Pay ment of Royal ty to the[Ministry] is due no later than on the seventh (7) working day after theend of the month, and is based on the sale of gold from that month."

Even with an international reference price, there may still be a number of questionsabout the appropriate value of a mineral. The base for the royalty is usually the value ata fixed point such as the mine mouth or the ex port point.

There are a number of dif ferent terms that frequent ly arise in mine-to-market deter-minations, and for someone concerned about how and whether product value ismeasured, it is necessary to be familiar with those terms. Some of the more commonterms you might see are:

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Mine mouth valuation: value is determined at the entran ce to the mine, withoutre ference to any extra value created by future processing or trans portation perfor-med by the mine owner.

Net-Back value: where a mineral is sold in processed form and is not pro cessed bythe mine operator, the royal ty base is the price at which the processed mineral issold less the cost of process ing and the cost of transporting the mineral from themine to the processing facil ity.

Net Smelter Return (NSR): the royalty base is the amount paid by the smelter or re-finer to the mine for mineral containing material (which is based on the value ofthe mineral con tained in the material) less the trans port costs to the smelt er andthe smelter processing charge.

Free on Board (FOB): where a price is FOB, it includes the cost of getting the productto the port and on board the ves sel, but does not include shipping costs.

If there is not an international reference price for the mineral, there will still need to bean assessment of the mine-to-market point to fix the value of the mineral. This addsmore complexity to this determination. And now you can see why a 5% royal ty is not al -ways the same thing as a 5% royalty. The big ques tion, which it pays to ask for most ofthese fisc al tools, is: "5% of what?"

If you are a government offici al trying to collect the right amount of royalty, this is veryimpor tant. You may find yourself in a dis pute over mineral valuation quite regularly.Get experts, hire lawyers, do whatever you need to do to ensure you're getting the royal-ty that is due. The chapter "So You Think You Need Help After All" addresses these kindsof issues.

The second ques tion is a manifesta tion of the “transfer pricing” problem, discus sedmore fully in chapt er 3 of this section. In brief, while it is generally understood that thevalue used as a base for the application of an ad valorem royal ty should be a valuebased on so-called “arm’s-length” transactions between willing and unrelated buyersand sellers, such transactions may be hard to find. Indeed, if the mining pro ject is onecomponent of an in tegrated minerals project that takes most or all of the output to an-other location for further processing or fabrication, or if the mining com pany primarilysells to affiliated companies, there may be no arm’s-length transactions. This is another

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reason why those London Metals Exchange and published prices are so handy--whoneeds an arm's length transaction when you can read the price in the newspaper?

Royalties Measured by Product VolumeUnder a unit or volume-based royal ty, the com pany pays a fixed amount for each unitof pro duction. In these systems, whether gravel is selling for $5 or $50 dollars per unit,only a set amount is paid to the state for it, maybe $1 per tonne.

Unit royalties are rare and general ly are limited to very low value commodities such asstone and gravel. With out intending any offense against the gravel and stone industry,this kind of royalty is...well, not very im portant for most industrial mining contractsaround the world, so don't worry too much about it.

Royalties Measured by Mine ProfitabilitySome jurisdictions, including Canada and Botswana, util ize royalties based on projectprofit levels.

These royalt ies can be quite attractive to a company. Backyard Goldmine Co. is reallyhoping for this one. Why? If there is no profit, no royal ty will be due. The royalty levelwill increase as profit increases. This makes Canada and Botswana quite attractive to in -vestors, as they will not have to pay any royalty in the early years when there is no profit.

Profit-based royalties do not simplify the valuation ques tion. . . they merely trans fer thequestion from “what is the value?” to “what is the profit?” This can be harder to figure.

A profit-based royalty can also be called a net profit royal ty, net interest royalty, or netproceeds royalty. The royal ty rates set on a pro fit basis will be general ly higher--sometimes well above 5%-- than those set on the sale value basis (bet ween 1% and4%). This will make more sense once you read the chapter on income tax, but just trustus for now: the allowable costs to be deducted for a royalty measured by mine pro-fitability will be much greater than in the case of ad valorem royalties (the first ones dis-cussed). Stay tuned for more on other profit-based revenue tools in future sections.

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Sliding Scale RoyaltiesSo far, we've been talking about fixed rate royalties, but royalty rates can vary as well.

Let's say there is a new sliding scale royalty that will now apply to Backyard GoldmineCo. When gold is at or below $1000 per ounce, the royal ty rate is 2.5%. When the goldprice is bet ween $1001 to $1500 per ounce, the royalty rate is 5%. When the gold price isbetween $1501 to $2000 per ounce, the rate is 7.5%. If the gold price is $2001 per ounceor higher, the rate is 10%.

Assume that Backyard Goldmine Co. creates one ounce of gold each month and it sellsthat gold on the first day of each month. Further assume that each month, the pricegoes up. A high er price will benefit Backyard Goldmine Co., of course, but it will also begood for the government. Let's compare a flat 5% royal ty versus the new sliding scaleroyalty.

January 1 price is $900 per ounce: the sliding scale is at 2.5% and yields $22.50 to thegovernment, while a flat 5% yields $45.

February 1 price is $1300 per ounce: the sliding scale is at 5% and yields $65 to thegovernment and the flat 5% royalty payment to the govern ment is $65.

March 1 price is $1700 per ounce: the sliding scale is at 7.5% and yields a payment of$127.50, while the flat royalty yields $85.

April 1 price is $2100 per ounce: the sliding scale is at 10% and yields a pay ment of $210while the flat 5% royalty payment to the government is $105.

While the sliding scale yielded less to the government at the lower price, the govern -ment does much better at the higher price. Assuming the cost of getting that gold outof the ground is not going up too, a higher price leaves Backyard Goldmine Co. and thegovernment better off.

This is what a sliding scale royalty looks like in the Li beria - China Union (2009) contract,Section 15.1(b):

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"The royalty rate for shipments or sales of Iron Ore in any month duringthe Term shall be as fol lows: (i) when the Index Price is US$100 permetric ton or less the royal ty will be 3.25%, (ii) when the Index Price isgreater than US$100 per metric ton and less than US$125 per metricton, the royalty will be 3.5%, (iii) when the Index Price is greater thanUS$125 per metric ton and less than US$150 per metric ton, the royaltywill be 4%, and (iv) when the Index Price is US$150 per metric ton ormore the royal ty will be 4.5%. The "Index Price" shall be the CVRD spotprice FOB Brazil for shipments to China for the same product ofequivalent grade and quality pro duced at [the mine]."

In this provision, "CVRD spot price FOB Brazil" refers to a published price for iron orethat is comparable to the price of the product pro duced at the mine. When that price ishigh, it is presumed that the pro fitabil ity of the pro ject is high, and thus a higher royal tywill be reasonable.

In these examples, the royalty changed with the price, but other triggers can be used. InSouth Africa, the royalty rate goes up from a minimal amount as profits go up, from0.5% to 7% for unrefined minerals.

The theory behind a royalty is that it is a payment to the state for the mineral resourcesowned by the state on behalf of the peo ple. A royal ty is not, strictly speaking, a “tax”. It isan ex change for the right to mine. Therefore, royal ty provisions are often found in astate’s mining law rather than in its tax law. Regardless of the philosophical underpinn-ing, however, royalties are a cost to the inves tor, like taxes, and are viewed by investorsas the equivalent of a tax for financing plann ing purposes. Which brings us to...

C O R P O R A T E I N C O M E T A X

A corporate in come tax is a standard element of every mining fiscal regime. Indeed, acorporate income tax is a part of any business entity's life. Backyard Goldmine Co. willdefinitely be subject to corporate income tax. Indeed, because it is a mining company, itwill li kely be subject to special income tax rules for mining projects, some of which maybe useful for it to re coup the large costs as sociated with the mining industry, while oth-ers may tax the high profits that can occur.

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Corporate income taxes are measured by the total income of the business less operat-ing costs and an allowan ce that permits the cost of the company’s investment in themine to be recovered over a number of years. Most other amounts pay able by the min-ing company to the government, such as royalties, import duties, bonuses, and the like,will be deducted in determining the company’s tax able income. (Some payments mightbe calculated after the tax, but let's leave that aside for now.) Let us illustrate.

Assume that Backyard Goldmine Co. managed to generate $12,000 in total revenues inits first year of business from selling a few pieces of gold here and there while it set upits office, hired staff, and the like. Assume that it had overhead costs of $500 for theyear (for those that might be worried about whether any capital expen di ture has beeninvested in the gold mine, assume that the answ er is "no, not yet" despite the fact thatthis would be well near impossible in real life). For simplicity, assume that the com panysold 10 ounces of gold, and the price is $1200 an ounce, yielding $12,000 in company re-venues. Backyard Goldmine Co. properly paid its royal ty on the value of the gold it sold,which is still a rate of 5%, and 5% of $12,000 is $600. It still costs $1000 an ounce. Thecor porate in come tax rate is 25%.

What is the corporate in come tax due on this ex ample?

Start with $12,000, the total revenues Backyard Mine Co. generated. If there were nodeductions for costs or anything else allowed at all, the government would get 25% of$12,000. But that's not the way corporate income tax typically works. It is try ing to taxprofit, so it allows for the deduction of costs (contrast this to royalty above, which didnot).

We need to start deducting costs (that are allowed to be deducted by the tax code) toget to the base to which the in come tax rate will apply. Put simply, we need to find the"taxable income" of Bac kyard Goldmine Co. and then apply the 25% rate to it.

The royal ty pay ment to government will be subtracted first, so $12,000-$600 = $11,400.Now subtract the cost of extracting the gold, $10,000, from the $11,400, leaving $1400.Now we need to deduct overhead costs of $500 from $1400. This gets us to $900 of tax -able income. It is on this amount, our taxable income of $900, that we apply the 25%cor porate income tax rate. Backyard Goldmine's corporate income tax payment for thisyear would be $225.

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Before we move on to more complicated deductions, it bears noting that corporate in-come taxes around the world have fallen in recent years, and now are generally in therange of 25% to 35%. Check your local and national tax code for details on your applic-able corporate income tax rate.

As important as the income tax rate is, the rules for measuring income are equally vitalin determining the impact of the income tax, as we saw above with our first example.These measurement rules can be quite complex and have a significant impact on thetiming of income tax payments when tax codes start to take account of the huge los sesthat mining companies accrue in the early years of a mining project. The calculation oftaxable income is an area that could be a whole book on its own. For example, deprecia-tion of assets and the deduction of interest from debt both reduce taxable income.These are dis cussed more below and in the next chapter.

We look at a few of the key rules below.

Depreciation of Capital InvestmentsIt’s easy to understand the basics of a tax calculation. You take money com ing in, sub-tract money going out, and voila … that’s your income tax base. Things get a little tri-ckier—but not too much—with the large investments generally made at the start of amining project. In that case, rather than subtracting the costs paid in one lump sum, taxrules provide depreciation rules that make a company subtract those expenses a little ata time for a number of years. From a company’s perspective, the faster the better, as it’salways better for taxpayers to pay their taxes as far in the future as possible. That’s whymany mining companies will push for so-called “accelerated deprecia tion”.

Loss Carry ForwardA typical mining com pany that is undertaking a mining project from the beginning willhave much higher expenditure than income in its initial years, as it needs to invest inmineral discovery and mine construction before it can begin receiv ing any revenue. Thehypothet ical com pany, Backyard Goldmine Co., would be no different. It has nevermined in any other jurisdiction before, so when it starts it has no other pro jects with in-come that could affect how it is taxed. How would Loss Carry Forward help BackyardGoldmine Co.?

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Income tax laws recognize that several years of expen diture with no profit is hard on amining com pany, or any company. Thus, the law permits taxpayers to deduct in follow-ing tax years items that could have been deducted in determining taxable income in thecurrent year but were not “used” because other permitted deductions had already beenapplied to reduce taxable income to zero in the current year.

For example, let's say the Backyard Goldmine Co. had $5000 in overhead costs for theyear instead of $500. We start still with $12,000, deduct a royal ty pay ment to thegovernment of $600 and the cost of extra cting the gold, $10,000, leav ing us with thesame $1400 before the deduction of overhead costs. If we now deduct $5000 from$1400, we are in the red, -$3600. At this point, the government does not want 25% of -$3600! Instead, the corporate income tax payment on that negative amount will beconsidered zero, and 25% of zero is zero.

But what happens to that -$3600?

The deductions exceeding income for year one can be carried over to year two, and of-fset against year two in come to reduce taxes payable in year two. Unused deduc tionsthat can be car ried forward for use in following years are customarily cal led “loss carryforwards". Bac kyard Goldmine Co. will be able to carry that loss forward into the nextyear and deduct it from its revenues next year, in addition to the other deductions(royalty, cost of extracting the gold, etc.).

Most tax codes will limit the length of time com panies can continue carry ing forwardsuch unused deduc tions, and if they cannot be offset against income within the re-levant time period, they are forev er lost. Some common periods are 5 years, 7 years, 10years, and even an unlimited carry for ward. In countries where there is a limit, the dis-ap pearance of un-utilized loss carry forwards can be perceived as a positive result forthe state because it will accelerate (and increase) the in come taxes paid by the com-pany.

Mining companies will often press for extens ions for longer periods of the basic losscarry forward provisions in the tax law in order to ensure that all allowable los ses can beused to offset income and thereby reduce total corporate tax liabilities.

Mine exploration may last 10 years, then another 4 years for construction. If loss carryforwards run out dur ing this time period in which the mining company is only incurr ing

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steep los ses, there is hardly any point to the loss carry forward. At the point the com -pany is generating revenues, in year 14, there would be no loss carry forward avail able.That would, to say the least, not be the outcome Backyard Goldmine Co. would hopefor. And it is likely that Backyard Goldmine Co. would not invest in a country with such aregime, unless there was some other very compell ing reason.

Some tax codes permit loss carry forwards to survive forever. These tax codes limit theamount that can be used in any year as a way to limit the effect of the unlimited carryforward.

We will leave this chapter with a point to consider: mining is hard ly the only capital in-tensive industry. From this view, despite the arguments that Backyard Goldmine Co.will certainly try to get as much loss carry forward benefit as possible, is special taxtreatment deserved?

Ring FencingRing fencing. Out of all the tax phrases we have discus sed so far, this might be the oneyou would puzzle over the most without a bit of ex planation. Rings? F ences? Am I still inthe tax sec tion? Yes, you are. Let us explain.

For income tax purposes, mining projects are often "ring fenced." This means that theitems of income and deduction or loss from one project cannot be com bined with theitems of income and deduction or loss from another project for income tax purposes.The consequence to a mining company of a “ring fencing” requirement is that the min-ing company cannot combine the deduction and loss items that arise in its de velop-ment of a second mine to offset the income aris ing from an older mine where all losscarry forwards have been used and income tax is now being paid. So if Bac kyardGoldmine Co. finds anoth er gold deposit several hundred miles down the road, ringfencing rules will determine whether expenses from the second mine can be used to of-fset taxes from the first mine.

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From the government’s viewpoint, ring fencing accelerates the collection of income taxrevenue by the host government, and it also keeps an earlier inves tor from having anadvantage in bidding for new projects. From the min ing company’s viewpoint, the abs -ence of ring fencing makes it easier to develop a second mine in the jurisdiction inwhich it has the first mine, because it can use the exploration and development ex pen-ses of the second mine to offset taxes payable on the income from the first mine. Thisresults in a large reduc tion in the cost of developing the second mine: if the investor has$100,000,000 of taxable in come at the first mine in year 8, and $50,000,000 of ex -ploration expen ses at the second mine, and could use those expense to offset the in-come from the first mine, taxable in come would drop by $50,000,000. At a 30% taxrate, the investor would have saved $15,000,000 that otherw ise would have gone to thegovernment that year.

If the second mine is success ful, the gain would not be a permanent gain to the inves-tor, because that $50,000,000 would not be available to of fset income from the secondmine when it starts to accrue, but it could effectively delay the flow of that $15,000,000tax to the government by many years.

Most govern ments will seek ring fencing because of its relatively favorable effect onshort term tax revenues, and because it is believed to level the playing field on new ex-ploration ventures between mining companies already operating in the country andpotential new en trants.

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Separate Tax Rates for the Mining In dustryOne last point. While corporate income taxes generally apply to all sec tors, it is not un-common for special rules to apply to the mining sector. These may be special rules fordepreciation, or special limitations on the ability to deduct certain “home office” costsfrom income, or they may include special rates. With regard to the ques tion of specialrates, in vestors may argue the mining business is so capital intensive that mining in-vestment should be en couraged through a lower tax rate, whereas the state may arguethat because mining utilizes a depleting resource that cannot be renewed, it should betaxed at a higher rate than other business.

Well, that wraps up our discussion of corporate income tax. Without a doubt, it is a sub-ject that can and does have en tire books devoted to it. We hope this section provided anaccessib le prim er to the topic and to royalties, the two most important revenue toolsused by govern ments to receive a moneta ry return on their minerals.

B O N U S E S

Bonuses are a common element of a mining fiscal regime in which mineral rights areprimari ly establis hed through specific contra cts rath er than through the grant of licen-ses under a regime that does not require negotiation for the issuance of the license.Bonus obliga tions are typically stated in terms of obligations to pay fixed amounts onthe occurrence of specific events, such as the effectiveness of a contract, the commence-ment of commerci al production, or the rea ching of stated production levels.

Signature BonusAs the name implies, a “signature bonus” is paid in connection with the signature or ef-fectiveness of a mining contra ct or a mining license. One of the original purposes of asignature bonus is to help the government recoup its negotiation costs.

While the amount may be the subject of negotia tion, the signature bonus normally in-volves the simple payment of a lump-sum amount. A general rule is the higher the ex-pected value of the deposit, the higher the signature bonus.

From the state’s viewpoint, a signature bonus should be paid concurrent ly with contract

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signature and not at some later date, after the contract has become ef fective. Why? Be-cause the state may have no effective remedy for failure to pay at that time other thantermination of the contract. This may be very difficult for the state to do if the contractotherwise is viewed as a good deal for the state. No one wants to have to start overagain. If the payment must be made before the contract becomes effective, and thecompany fails to make it, then the state does not have to go through the process of ter-minating the contract, it can find a new company instead. For a company, the lack of abinding contract in place makes pro viding a large upfront payment a risky proposition.

On the other hand, signa ture bonuses or other payments made to the state before a de-velopment decision has been made are disliked by inves tors. Prior to the time the inves-tor decides to develop a dis covered de posit, the investor will view all its expendi tures asspeculative and highly risky.

Backyard Goldmine Co. will not want to pay any bonus, and signature bonuses are par-ticularly harsh on project economics since profitability may never occur if minerals arenot found; and even if it does, it is years away. It is therefore often easier for a state torequest and obtain sizeable bonuses associated with specific stages of developmentand pro duc tion.

Pro duction BonusesBy contrast, production bonuses are treated by the in vestor as part of overall productioncosts, and are part of the total decision made to develop the mine. An example of astaged production bonus from DRC - Tenke Fungurume contra ct (2010), Article 4(d):

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"In addition, TFM [Mining Company] will pay to Gecamines [NationalMining Company] the follow ing additional amounts:

- US$ 5 mm after the conditions set forth in Article 15 herein have beenmet in full force and effect

- US$ 5 mm at 0.5 mm tonnes cumulative copper pro duction from theProject

- US$ 5 mm at 1.0 mm tonnes cumulative copper production from theProject

- US$ 5 mm at 1.5 mm tonnes cumulative copper production from theProject

- US$ 5 mm at 2.0 mm tonnes cumulative copper pro duction from theProject

- US$ 5 mm at 2.5 mm tonnes cumulative copper production from theProject."

Bonuses are the most simple of all revenue tools.

Lest you get too comfortable, let's go to the most controversial of revenue tools.

S T A T E E Q U I T Y P A R T I C I P A T I O N

Imagine that Bac kyard Goldmine Co. has been doing fairly well for the past few yearsand it is about to go into commercial production of gold, at long last. Just at this point,your lawy er gets out the Mining Contract and tells you to sit down, she has some im por-tant news for you: the state is about to come in as a shareholder in Backyard GoldmineCo.. You have no choice in the matter whatsoever. The state has the right to join in as alegal in terest holder in the mining company.

The issue of state equity participation in mining contracts may be the most controversi-al aspect of any component of the fiscal regime. State participation in project equity can

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take many forms:

the state could participate as a normal investor, and pay a share of pro ject expensesproportionate to its acquired equity interest.

the state could receive what is called a “carried interest” where the investor pays allor a portion of the state’s nominal share of project costs, and recovers that amount,plus a return, from dividends that would otherwise be paid to the state.

the state could make some non-cash contribution to the pro ject in return for itsequity, such as the provision of infrastructure facilities.

the state could trade reductions in future tax liabilities for a present equity interestin the project.

the state could receive absolute free in terest, pursuant to which it would pay noth-ing for its interest and would be entitled to dividends as soon as any other inves torin the min ing company received any distribution.

While the challenges of state participation are many, a few are important to highlight.

The pressure for state equity par ticipation usually comes from both politicians and or-dinary citizens. There is com monly a general feeling that because the mineral is the pro-perty of the state, the state should participate in the exploitation of and share in the“up-side” of its mineral deposits – and the obvious way to do this is to participate in pro-ject ow nership. It is argued, not without justification, that state participation in ow -nership can assist in the trans fer of technology and in the development of managementcapacity, and place the state in a bett er position to take over full ownership and operat-ing respon sibility upon expira tion of the mining contract or the underlying mining li-cense. Some states have been relatively success ful with this strategy.

But state participation in a project company is a double-edged sword. Participation inownership implies, in the first instance, participation in the costs of developing themine, unless the state receives an absolute free carry, which has its own issues. De-veloping states, which most com monly make this demand, typical ly do not have thatamount of money rea dily available, which means that they have to ask the investorcompany to pay the state share of development costs as well as the investor’s share.

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And if the state does try to make the payment itself, it will pro bably be diverting fundsfrom urgent infrastructure or other development needs.

Further, unless the state uses great care in structuring its investment in the mining com-pany, it may also find itself in a relatively powerless position. In a corporate structure,the majority owner can normal ly control the payment of di vidends and make most cor-porate decisions, so that a minority state shareholder must negotiate a complicatedshareholder agreement to protect itself from such things as a decision to use all avail-able free cash to upgrade the mine rather than to distribute dividends to the com pany’sowners.

Such participation can lead to an acrimonious relationship between the state and thecompany. There can be many disag reements over costs, strategy, and other areas thattypically fall exclusively within the decision-making power of the company.

Therefore, if the state is truly looking for revenue and not prestige, it should at leastconsider wheth er the expected benefits of equity ownership can be substantially ac-hieved through the use of other more flexible fiscal instruments.

Finally, companies, particularly private companies, are general ly free to partner withwhomever they would like to conduct their business. Putting together the right peoplefor a team of any kind, whether as shareholders or joint venture partners, can becritically important for the suc cess of a pro ject. State participation li mits the choice ofpartners a company can choose for management and ow nership. While there may bebenefits to the state, it can present additional challenges for a com pany.

C A P I T A L G A I N S T A X E S

In addition to the pro fits generated through the sale of minerals, mining com pan iesand investors may also realize pro fits through the sale of a project or mining right toother companies.

In some cases, the gains from such transactions have been quite spectacular, and com-panies and governments have been highly criticized and the public frustrated when thecountry does not share in the gain. This is particularly so when the investor is selling or

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“flipping” its in vestment early in the investment life when the government may not yethave received any sig nificant revenues.

The biggest challenge for the host government is jurisdictional – actual ly having powerover the seller or the buyer. If the local com pany sells the license, its gain will be subjectto the same tax rules applicable to any other capital gain in the host country. Buttypically, the local company will be held by a holding company located outside of thehost country, often in a low or no tax juris diction. If the inves tor sells an interest in theholding company, neither the seller nor the buyer will be present in the host country.Because of the difficulty in rea ching the seller – and in some cases because of restrictivetax treaties – most jurisdictions have until recently left such gains untouched by contra-ct or statute.

The size of recent gains realized by selling shareholders in some less developed count-ries has attracted clos er scrutiny, and governments are now in the early stages of de-veloping contractu al and statuto ry approaches for reaching such gains. Some contractsalready require government approval of changes of control which would in clude in-direct changes resulting from sales of a controlling interest in the holding com pany.The approv al can require demonstration that the upstream seller has paid any tax dueto the country on the gain, but whether a tax is payable still depends upon modificationof contracts or chan ges in tax law or regula tions. Moreover, such rules only reach caseswhere the sale of interest is sufficient to cause a change of control. Although we havenot seen it in the mining area, some recent contracts in the petroleum sector havespecifical ly addressed the tax obliga tions of the upstream investor if an interest is sold.

It should be noted that the concept of “control” is itself chal lenging. Lawyers can spendmany words try ing to ensure that any action which results in a new person, group ofpersons or company having the direct or indirect ab ility to elect a majority of the di rec-tors of the mining company is treated as a change of control.

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W I T H H O L D I N G T A X E S

As the owner of Bac kyard Goldmine Co., you will certainly want di vidends from your in-vestment. And the government will want to withhold taxes on that dividend, as some-thing like a pre-payment against your year-end income tax liability (this is similar inpractice to many taxes that are withheld from the paychecks that employees receivefrom their em ployers).

Withholding taxes are an important and often poorly understood element of a miningfiscal system. The pay ments made by a min ing company to its lenders (interest), to itsowners (dividends), or to its contractors, service provid ers and consultants are usuallysubject to withholding taxes. When Backyard Goldmine Co. hires a drilling company totake core samples, it will "withhold" a certain amount of the payment to that drillingcompany on its income tax form at the end of the year.

The first thing to understand about withholding taxes is that they are not taxes on thelocal mining company at all. They represent amounts the mining com pany is requiredto “withhold” from the kinds of payments listed in the preceding para graph and to payover to the state on account of the actual or projec ted tax liabilities of the payment re-cipients.

For ex ample, as sume a contract or law calls for a 10% withholding tax on payments tosubcontractors. If the subcontrac tor charges $1 million for a service, the mining com -pany would be required to withhold $100,000 from its payment. The subcontractorwould thus receive only $900,000 (in practice, a subcontractor might adjust its fee to$1.1 million to make sure it receives its full million dollars). If that subcontractor is a re-sident taxpayer, the money withheld by the mining company will be treated as a taxpaid by that subcontractor and would be credited to its eventual tax bill. If the sub-contractor is not a resident, however, the amount withheld will often be treated as a“final” tax, fully satisfy ing any tax liability the contractor may otherwise be deemed tohave to the state with respect to income from that contract. The reason for this, in anutshell, is prac ticality and ease of administration.

The im portance of withholding taxes can be eas ily seen with a sim ple example. As sumeCompany A, Backyard Goldmine Co., is a local mining company using no subcontrac-tors. It does all of the drilling, waste treatment, and all other mining operations itself.

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The profits from the mining ac tivity would be taxable income of Com pany A (we'resimplifying things here for purposes of illustration), and the state would collect taxes onthat income through the general corporate income tax.

Now assume Company B, Frontyard Goldmine Co., operates an ident ical mine, but rel-ies on overseas subcontractors for most of its operations. In this case, instead of all ofthe profits from mining accruing to the local operator, as in the case of Com pany A,some share of the profits are in fact earned by the overseas subcontractors. Those pro-fits are part of the pay ments made by Company B and deducted in comput ing its in-come tax, and without a withholding tax or some other way to reach the subcontrac-tors, the pro fits would go completely untaxed.

Generally applicable rates of withholding are typically included in income tax legisla-tion, but mining contracts may provide for full or parti al exemptions of these taxes ormay stabilize them for some period of time as an incentive. Practice varies widely bothin terms of the rate of withholding and in terms of different treatment of vari ous kindsof payments – interest, di vidends, or services – and rates may be lowered for some initi -al per iod as an in cen tive. Rates at the level of 5% and 10% are common. It is also com-mon for double taxation treaties to limit withholding taxes as discussed in more detailin chapter 3 of this section and thus what is written in statute or contract may not be theactual rate when the investor is able to take advantage of a lower treaty rate.

Below is an example of the issue of withholding taxes being treated in a mining contra-ct, Liberia - China Union (2009), Section 14.3(c):

"In lieu of the withholding rates provided by Section 806 of Schedule 6for non-residents and as provided by the Revenue Code for residents,the Concessionaire shall withhold tax on payments made to non-residents and residents at the follow ing rates for the first 12 Years: (i)Dividends, 0 percent; (ii) Interest, 5 percent; (iii) Pay ments for services,5 percent. Thereafter withholding shall be at the rates provided by Sec-tion 809 of Schedule 6 for non-residents and as otherwise pro vided byapplicable Law for residents."

One important issue with respect to withholding taxes that is too complicated to dis-cuss in de tail here is the question of whether a state’s withholding tax obligations

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should extend to pay ments made by the mining company for services performed by anon-affiliated company done at locations outside of the state, when that service provid-er has no con nection with the state other than the fact that it is billing the in-state min-ing company for the work. For ex ample, Backyard Mining Co. sends core samples to an-other co untry for testing for its gold content. Should that core sample testing company,which has no relationship with the host country of Backyard Goldmine, be subject towithholding tax in that other country? This book does not take a position on this ques-tion, but it is one that is subject to much debate.

F L E X I B L E T O O L S A N D R E N T T A X E S

Mineral prices are inherently unpredictable and may rise and fall dramatically over thecourse of a given mine's life. Costs may also fluc tuate significant ly. One challengegovernments face in the design of fiscal systems is how to capture a sizeable share ofunusually high profits without making projects un sustainable during times of lowerprofitability. For this purpose, states now are favoring progres sive revenue tools thatwill capture an increasing share of revenues as profitability rises. As discus sed with re-spect to profit-based ad valorem royalties earlier in this chapter, the hope is that re-gimes containing such tools will be more stable over time because they provide equit-able returns to the mining company and to the state over a wider range of circumstan-ces.

Such revenue tools usually come in the form of additions to other base-line fiscal instru-ments. While the actual names of these taxes differ from country to co untry, theyusually are expressed as:

Windfall or excess profits taxes, which despite the names are typically triggered byhigh prices without regard to the as sociated level of pro fits;

Resource rent taxes; and

Sliding-scale royalties based on pro duction: In addition to the ad valorem andprofit-based royalties dis cus sed above, there is the potential for a production-based royalty. While these are common in oil, they are less common in mining, butare possible.

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First, some ter minology. "Rent" is the term used by economists to describe the return inex cess of the mini mum return an investor requires in order to make an investment.Thus, if an investor requires a 25% ex pected return for a given investment, returns in ex-cess of 25% are the "rent." Theoretically, these could be taxed at a 100% rate without af-fecting the investor’s decision to invest. In practice there is no clear line regarding theminimum return required by inves tors and there is no serious attempt to tax all “rents”over and above the profits tax except in modest amounts.

Flexible tools to capture rents are quite prevalent in the petroleum sector, but less so inmining. But there is increas ing interest in such taxes in mineral-rich co untries intent oncap turing a larger share of rents without overtaxing the industry during periods oflower profitability. Each of these may be found in legislation and/or contracts. Whilethe emphasis and political motiva tion in introducing progressive tax instruments hasbeen on capturing upside revenue or pro fit potential, they are also expected to bringfiscal flexibility or robustness to the overall fiscal regime, i.e., auto matic ad justment tochanging circumstances - lower government take when pro fitability is low, higher takewhen profitability is high.

This concept is typically called "progressivity" and it is important to understand. Whileall fiscal tools will give the government more money as prices rise, some do so betterthan others. For instance, if a co untry only collects a royal ty, it may get more money asthe price of gold rises, but the extra money it gets will not measure up to the extramoney the company will get. The company's "share" of the total revenues will be greateras the prices rise. This is called a regressive tax. With a progressive tax, the situation isreversed. Both the com pany and the government will do better with higher prices, butthe government's share will rise faster than the com pany's. Governments like this, of co-urse.

One last thing to remember ... while each fiscal tool can be either progressive or regres-sive, it is important to look at how they all work together. A fiscal regime can have aroyalty and income tax and a more pro gressive tool and still come out regressive on thewhole. The devil is in the details.

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Resource Rent Tax (RRT)RRTs are the most sophisticated of the various mechanisms used to capture rents. Atypical RRT has three basic components: (1) a threshold rate of return for the miningcompany (or several thresholds) above which the tax applies, (2) the specified tax rate(s)that apply once that threshold has been exceeded, and (3) a tax base, which is typical lycash flow from a particular project. Whereas an income tax appl ies to taxable income,RRTs will typically apply to cumulative cash flow – looking at the cash out (pay mentsfor capital and equipment, goods and services) and cash in (revenues from sales). (Inmeasuring cash flows, costs and payments relating to the financing of the project arenot taken into ac count.) If profitability ex ceeds the threshold, for example a 20% thres -hold rate of return, a tax is paid on the ex cess.

While measurement of the rate of return at a given point in time sounds somewhatcomplex, in practice this is a mechan ical calculation relying on some of the same ele-ments needed to compute taxable income. There are relatively few examples of miningprojects subject to RRTs (they are more common in the oil sector), but growing con-sideration is being given to them. Those contracts utiliz ing RRTs either have detailedannexes setting out the computa tion or refer to legislation.

Price-Based ToolsRather than attempt to measure pro fitability directly through the calculations in anRRT, another approach is to use commodity prices as a rough proxy for profitabilityunder the assumption that high er mineral prices lead to higher pro fits. A sliding scaleroyalty, for instance, could apply a higher royal ty rate for a price higher than the be-nchmark reference price. In some cases countries have applied “windfall” profit taxeswhen prices exceed certain levels. The windfall profit tax is usually a percentage of therevenues attributable to the difference between what the inves tor would have earnedat the threshold level and what the investor earns at the actual higher price. Becausesuch taxes do not take account of costs, they are only loosely related to profits, and haveoften been repealed after investor opposi tion to the tax (see, for example, Zambia's ex -perience).

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Com munity Develop mentAn emerging practice is for affected communities to share immediately in the financialbenefits of a min ing project by having a dedicated revenue stream that goes straight tothem and not through the central tax authority first.

Some times this revenue stream is negotiated within the fiscal package between thenational govern ment and the company. This is the case in Guinea for example. In thissystem, the national government may negotiate the community development revenuestream with the mining company on behalf of the com munity. The Guinean MiningCode, Article 130, requires that 1% of the turnover of gold mining com panies be paidinto a local development fund that will be administered at the local level.

Under a different system, communities may negotiate with the com pany directly. Thisis the case in Canada or Australia, where indigenous communit ies are consideredsovereign nations. In Canada, for example, Falconbridge, a mining company, signedwhat was called an “Im pact and Be nefits Agreement” di rectly with the Inuit peo ple ofRaglan in northern Quebec. In the 20 years since, the company has made direct pay-ments to the Inuit in a model that created a precedent repeated elsewhere, at Quintettein the Yukon, for example. A similar arrangement holds at the Kakadu uranium mine inAustralia’s Northern Territory.

It is important to understand that these examples describe a situation of direct pay -ment from the company to the community, not simply an agreed revenue sharingmechanism from the central government down to sub-national institutions.

O T H E R T A X E S

Import DutiesA sometimes con ten tious and complicated aspect of many fiscal regimes is the applica-tion of the gener al import tariff regime to the mining sector. Such duties are often sig-nificant revenue sources in low-income countries; they also may be used to protectdomestic indust ry.

Import duties can make a huge difference to the overall profitabil ity of a mine. Because

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mining is capital intensive, overall company pro fitability depends a great deal on thetiming of costs and revenues. Heavy up-front costs are only amplified by the addition ofsignificant import duties. Moreover, many of the goods imported during explorationand development often cannot be obtained locally (thus making the domestic sectorprotection objectives irrelevant). In recog nition of this, many countries will reduce oreliminate import duties on capital goods or goods specifical ly intended for project use.If the Backyard Goldmine Co. has to pay import duties on every earth-mover, front-endloader, and other piece of equipment needed to mine, it is easy to see how this couldmake already steep upfront costs that much higher.

One special problem occurs with goods like gasoline which are fungible and can easilymake their way into the non-mining economy, thus avoiding the tariff. Many miningcontracts will have specific provis ions such as volumetric limitations to deal with theseproblems.

If, however, the state con tinues to collect import duties, it would receive the importduty tax revenues much sooner than it would receive the additional income tax re-venues. From the state’s point of view, this would be a useful tradeoff. Considering im-port dut ies alone, if the import duty is 5% and the contractor must bring in $250 millionof goods and equipment, this is an additional $12.5 million of revenue that will be avail-able far earlier than any income tax proceeds to the state. Very often, inves tors will seekexemptions from these import taxes.

Value Added TaxValue Added Taxes (VATs) are a common type of con sumption tax, i.e., they are appliedto a taxpayer's consumption rather than its income. VATs apply to domestic consump-tion, and thus VAT is generally paid on imports and refunded on ex ports. Since it iscommon for a mining company to ex port the bulk of its mineral pro duction to inter-national markets, it is consistent with the principle of a VAT that these exports not bearthe burden of a VAT and are ex empted or otherwise receive a refund of VAT paid. Be-cause refund mechanisms are frequently inadequate, contracts often will exempt min-ing companies from having to pay VAT on their capital im ports or other materials usedin mining.

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Surface Rent al PaymentsAnother ele ment of many fiscal regimes is a surface rental payment to the centralgovernment, or sometimes to subnational governments. (These should be dis tinguis -hed from payments to private landowners, which are not a part of the state's revenues.)Surface rental payments will usual ly be a fixed or per acre fee and may adjust auto-matically for in flation. They are not ordinarily a significant revenue source, but they dis-courage ex cessive land holdings.

B U I L D I N G T H E R E V E N U E M I X

It is clear that there are a number of revenue tools that can apply to a mining project. Itcannot be said enough: revenue tools absolutely cannot be viewed or evaluated in isola-tion. They must be assessed as a whole, as a "Fiscal Regime."

One must take account of the differences among tools. Income taxes do not begin togenerate significant revenue for a number of years after production begins. Why? Be-cause income tax laws allow tax payers to deduct operating costs and the cost of theirplant and equipment from their sales revenues to determine taxable income. Miningcompanies accumulate very large costs of these kinds before they ever see significantoperating revenue. Therefore, although they may have a large cash income once opera-tions begin, they may have little or no taxable income until they have recovered theirearly operating costs and much of their capital costs.

Royalties, on the other hand, have the advantage of providing an income flow to agovernment from the beginning of production. But this advantage to the government ishard on the investor: it is sending cash to the government when it still is recouping itscosts and may even be investing in mine expansion or other large investments. Be causemost royalties take a fixed percentage of total income, they have the effect of “squeez-ing” the investor. As mineral prices fall, mining costs do not fall proportionately, so thatthe margin between mining costs and revenues available to the mining com pany afterroyalty payments will fall. This can lead to premature decis ions to close a mine or tocurtail production. Conversely, the profit spread will widen with only limited govern-ment participa tion if royalties alone are used.

Over the life of a mine, the different revenue tools may fit together to look something

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like the di ag ram below over the lifetime of a pro ject. Of course, it will depend on whichfiscal tools a country uses, among a number of other factors. This is just illustrative ofone possible outcome in a stylized model.

It is important to remember the trade off of upfront payments. Upfront payments canbe "expensive" for the state. Inves tors ex pect that many ex ploration expendi tures will gounrecovered. The rate of return they ex pect from suc cess ful projects must be enough tocompensate them both for the costs of that project and to compensate for some of theirunrecovered exploration costs from other unsuccessful pro jects. An up-front pay mentmade before any discovery will be treated by the inves tor as a high-risk explorationcost; even a seemingly small front-end payment may be high enough to persuade an in-vestor that an exploration program is too risky.

Resource rent taxes have the advantage of not impacting the inves tor except when theinvestment has been highly successful. They provide the government with a measure ofassurance that the state will have a larger share in profits when there are high returnsbut do not burden the in vestor when returns are lower. This may pro vide a better balan-ce of the economic and polit ical interests.

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How does one evaluate a particular fiscal regime or regimes in a given co untry? For this,a tool called a financi al model is needed.

F I N A N C I A L M O D E L I N G

While governments and citizens of course want to maxim ize the benefits from an in-vestment through taxes, infrastructure, corporate soci al responsibility and othermeans, the reality is that a company's budget is not endless. The trick for governmentsis to know how much they can get from investors without putting their invest ments atrisk. And for this, you need a financial model.

Financial models are fundamental instruments of planning, negotia tion and fiscal poli -cy. They will tell you such things as :

What is the trade-off between “quick money” through signa ture bonuses and ahigher share of long-term profits?

What is the efficien cy of tax incentives?

What is the equitability of the fiscal regime for investors and government?

If we chan ge the tax regime, what is the impact for the parties?

How does one fisc al regime compare with others?

What is the fairness of the current and potential deals?

What long-term public investment policy can be funded and planned?

What are the effects from chang ing prices?

All companies generate a financial model (usually a spreadsheet in Excel or a similarprogram) showing cash flows, mine operations and various taxes under differentscenarios, to consider their side of the financial story. When pressures are made oncompanies, the cost implica tions are plugged into the model to determine the effects orimpact on the rest of the mining operations.

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Some decis ions that are important for the country's economic development may havelittle impact on a company’s operations, and some may even improve their cash flows.An ex ample is power supply. A company may determine that a certain capital ex pendi-ture on power will be needed to ensure the mine has a reliable power supply. Doing thisalone, as in most cases in the past, would invol ve high upfront costs for the com pany.Partnering with the public sector to provide larger supplies could mean lower unit costsand even lower initi al capit al ex penses. It is therefore useful to know the com pany's fin-ancial model or to generate a proxy model in cases where the company will not sharetheirs with the government. This will not only give the government an idea of how vi-able a de cision may be, but also, at which point certain issues can be raised with thegreatest chance of success.

The same government "take" can be arrived at using dif ferent tax instruments, somodeling can help the parties negotiate a different set of tools that will arrive at asimilar total sharing of the revenues over the life of a project. Moreover, the tim ing ofgovernment revenues will be significantly affected by the choice of instruments. To rea-lly understand this interac tion and the im pact of different tax instruments, it is im por-tant to build fin ancial models that forecast the revenue/profit flows of a project acrossthe life of the mine and under various possible scenarios, taking into account the in-herent uncertainties, especially of future market prices.

But it is also possible to get a little carried away with model ing. You have to keep inmind that a model only predicts outcomes under a range of assumptions (prices, costs,etc.), and that those assumptions are just that ... as sumptions. Howev er important anduseful they are, they will seldom if ever perfectly pre dict rea lity. If used to assist in pre-dicting revenues (for national budgeting purposes, etc.), they will need to be continual-ly updated to adjust assumptions and account for past activ ity.

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S P E C I A L C H A L L E N G E S

In this chapt er, we summarize some of the issues that preoccupy those tasked with de-signing and enforcing a fiscal regime for mining.

H O W M U C H D I D Y O U E A R N ?

Revenues raised by taxes depend not only on the tax rate but also on the rules for cal-culating the tax base. You might think this should be straightforward - BackyardGoldmine Co. declares what it sold the gold for and what its costs were, and the statetaxes the difference - the profit - at a given rate. But there are some significant ways thatthis crisp picture gets blurred.

Backyard's own financing costs may eat up a large amount of income ("thin capitaliza -tion"), and need to be evaluated. Or Backyard may buy many of its inputs from, and sellmuch of its gold to, other companies it controls ("Backyard Goldmine Holding BV" in theNetherlands, "Backyard Goldmine Trading Inc." in the Cayman Is lands), making it hardto know what the real price is (an issue of "trans fer pricing"). Or it may have locked in aprice ahead of time to deal with its own cash flow needs that ends up being considerab-ly more - or less - than the known market price ("hedging"). Let's take each of those inturn.

The In terest Deduction and De bt/Equity Limita tionsMining contra cts or legislation often establis hes a maximum ratio of debt to equity fin-ancing for a project. An example from Liberia - Mittal (2006), Article 14:

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"At no time shall the ratio of Debt of the CONCESSIONAIRE to Equity ofthe CONCESSIONAIRE exceed 3:1.[. . .] For purposes of this Section 3,“Debt” shall mean the long-term debt of the CON CESSIONAIRE and“Equity” shall mean the shareholders’ equity in the CONCESSIONAIREas defined by standard accounting practices.[. . .]"

The contra ct prevents the com pany from borrowing more than 75% of the money itneeds to invest in the project. This is because the interest on debt fin ancing is allowableas a company cost. And that means that, given the choice, com panies will often pref erto finance their operations through debt rather than tie up their own capital. The Li-berian contra ct addresses that issue by capping the pro portion of debt to equity.

Another approach to the same issue is not to cap the debt, just the degree to which in-terest payments on it are an allowable cost, in a rule known as “thin capitalization.”Below is an exam ple of such a provis ion from the Mongolia - Oyu Tolgoi (2009) agree-ment:

"Section 2.31.1. if the Investor's debt to equity ratio ex ceeds 3:1, any in-terest attributable to the excess debt will not be deductible for Tax pur-poses;

2.31.2. if the Inves tor's debt to equity ratio ex ceeds 3:1, any interestattributable to that part of the debt that does not exceed the ratiostrictly remains deductible for Tax purposes;

2.31.3. for the measurement of total debt for the purpose of the ratio,both related party and non-related party debt are included, however,any non-interest-bearing liabilities are specifically ex cluded;

2.31.4. for the measurement of total equity/capital for the pur pose ofthe ratio, both common shares and preferred shares are included; and

2.31.5. any non-tax deductible in terest shall be deemed to be a dividendand taxed in accordance with laws and regulations and applic abledouble tax treaties. Any such non-tax deductible interest will not besubject to any interest withholding tax."

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There are other approaches as well. Under some systems, interest deductions are li-mited to some specified percentage of tax able income. This means that, even in earlystages of the project when the company might have huge debt from capital outlays, theinterest deduction can never totally eliminate taxable income. An oth er key goal ofdebt-equity limits is to ensure the company has a stake in the game. It has to have someof its own money at risk.

But how do you check all of this stuff out? After all, the government now has to analyzesubmissions made to it by the company not only about its costs and sales, but alsoabout its terms of borrow ing. And if interest payments are deductible from the overalltax bill, how does the government ensure that they are reasonable? While some contra-cts specify using benchmark in terest rates, related, for instance, to LIBOR (the LondonInterbank Over night Rate used by banks to borrow from each other), many more donot. This could be a particularly challenging issue if the com pany is borrow ing from anaffiliate - as it often does.

Transfer Pric ingMore than half of all cross-border trans actions around the world are happening bet-ween companies that are affiliated. This is equally the case in mining. As it has now be-come an international operation, Backyard Goldmine Co. may buy a lot of goods or ser-vices from Backyard Goldmine In dustrial LLC, incorporated in Bermuda, and sell a lot ofits gold to Backyard Goldmine Trading SA, for mally incorporated in the small Swisstown of Baar but mostly active in East Asian markets. The prices in such trans actions areknown as “transfer prices.” The ques tion is, how do we know that these prices reflecttrue mar ket value?

The term "transfer pricing" or "TP" has become synonym ous in some circles with nefari -ous practice. But it is important to understand that transf er pricing itself is a central in-strument of international global markets. Tax ac countants have fierce de bates aboutwhich TP rules are the most appropriate. OECD has a system of TP guidelines. The UNhas another system. Many countries have developed their own approaches. The pro -blem is if transfer pricing rules are abused.

How might that happen? Well, suppose Bac kyard Goldmine buys all its inputs from af-filiates in the Cayman Islands, a low-tax juris diction, and pays twice the going rate for

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those goods. Suppose it also sells the gold for a 30% dis count off world market prices toan affiliate in another low-tax jurisdiction - one might even say "haven." It would find it-self with far less income in its host country - and therefore have to pay far less tax. Itmight have more in come in those other countries, but since those countries have lowrates of corporate taxation or none at all, the tax bill is going to be low. Things are look-ing good for Backyard Goldmine.

How to guard against it in the contract? It's quite dif ficult, but there are a few thingsthat can be done to help. Most tax codes or mining ag reements require prices in suchtransactions to be at the same price as a company would obtain in an "arm’s-length"transaction. But determining the arm’s-length price and monitoring such trans actionscan be challenging. To assist governments in this respect, some mining agreementscontain provisions requiring reporting of such trans actions, documen tation of the basisof the arm’s-length prices used and, in some cases, a certification from a company of fic -er about such prices, such as the following, from Liberia - Putu (2010), Section 17.4(e):

"Each year’s fin an cial statements shall be accompanied by a certificateof the chief financial officer of the Company to the ef fect that (i) withrespect to goods or services covered by any Pricing Ag reement in effectduring the relevant period, the Company’s trans f er prices during suchyear were computed in accordance with the requirements of such Pric -ing Agreement and (ii) with respect to goods or services sold or pro -vided in a transaction between the Company and an Affiliate or a Re-lated Person of the Company which are not covered by such Pricing Ag-reement, the prices thereof imposed during the relevant period werecomputed in accordance with Section 20.7."

One critical part of the cost-sales dynamic is the market value of the com modity. Forroyalties, this may sometimes be handled by basing the royalty calculation on a publicinternational reference price rather than on the actual price received by the seller (seethe discussion of royalties). But this may not always be pos sible. Not all minerals in allmarkets have real-time published prices, although more "benchmarks" for more com-modities have become available in recent years. One small caveat: even when an inter -national reference price is being used, there may be a quality dif ferential off that inter-national reference price, upward or downward, that needs to be taken into account.

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And just one more "Except...". Sometimes the price in the export market might not ac-curately reflect a fair price for any given source co untry. In that case a "net-back" pricerelating the public price to the price in the mining juris diction could be used. Thismeans subtracting all the transport, insurance and other costs it took to get the com-modity from the host country to market. Sometimes an estimate of the minerals’ valuein the mining jurisdiction may be agreed ahead of time by the government and thecompany in what is called an "Advanced Pricing Ag ree ment" (APA). Rather than thegovernment checking costs shipment by shipment, both sides agree on a method ofdoing the valuation to save themselves the troub le of arguing over it later. APAs aregeneral ly not included in the mining contract itself, although the contract could requirethe company and government to make one before pro duction starts.

Management fees paid by the local company, “Backyard Goldmine”, to its parent for ser-vices provided by the parent are another difficult transfer pricing area. These are oftencalculated as a percentage of operating costs or invest ment with percentages rang ingwidely. Such charges can significantly reduce taxable income, and finding com parablemarket transactions is difficult. Some governments limit such deductions to a fixed per-centage, e.g., two percent of operating costs. In some cases charges by the home com-pany may be limited to actu al cost with some agreed profit mark-up. In all cases it is de-sirable to be clear what services by the parent or affiliates are covered by the manage-ment fee, perhaps by a schedule identifying any charges or services not covered. In par-ticular it is important to know whether such charges include all the necessary know-how or intel lectual property that is required by the mine

The complexity of the supply chain in the modern world is hard to overestimate. Justone example: when the government of Uganda exercised its right to audit an oil com -pany at a very early stage in the project, the company had already contracted with over200 other companies. Lots of what it bought were services for which no ready marketprice existed. The same is true for mining operations.

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Hedg ingTo protect against price fluctuations, companies often “hedge.” For instance, some lend-ers may require mining companies who borrow from them to reduce their exposure tofuture drops in com modities prices by selling some portion of their future produc tion ata price ag reed today. This is typically called a “futures contract.” Or it may pay a smallsum now to buy the "option" to sell at a given price a few months from now - which itwill either ex erc ise or not depending on market prices at that time. These financial in-struments - and many others - may protect the com pany against a price crash (thetrade-off is that they may not get the full benefit of future price increases).

Hedging can help a company negotiate volatile markets and ensure that projects re-main economically viable. As a side note, many think the mas sive "financialization" ofcommodit ies markets has also helped fuel the unprecedented price rises of the last de-cade, though that is not our subject here. But hedging can also mean actual sales re-venues of the mine company are quite different from what is ob served in the market.For instance, if Backyard Goldmine Co. has agreed to sell all of its production for thenext five years at a price of $1,200 per ounce but prices rise to $1,600 per ounce, thecompany will not be as profitable as it would have been without the hedge. On theother hand, if prices in that period fall to $800 per ounce, it will be much more pro fit-able - and its revenues will be protected.

From a host government’s perspective, this can have undesired consequences. Mostsimply, in the case in which the sales price is below the market price, the hedg ing trans-action could cut the royalties received by the government if the royal ty were based onthe received sales price (rather than a published market price).

To avoid this, some jurisdictions specify that royalties be based on spot (present) ratherthan future market prices and specifically exclude hedg ing operations from determin-ing tax able income. The company can still hedge, either through its international op-erations or through a separate local entity. But state tax revenue will be insulated fromthose financial decisions.

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S T A B I L I Z A T I O N

A significant min ing project and as sociated in frastructure can require bi llions of dol larsof capital. Once in place this capital cannot for the most part be readily moved. As a re-sult, investors have a strong interest in the stability of the fiscal regime during the li-fetime of the project - which as we have seen could be as long as 50 years or more. Thegovernment itself may also want to reassure the inves tor. This is es pecial ly an issue injurisdictions with weaker institu tions or without an extended period of political stabil-ity.

This issue is frequent ly resolved through the use of a stabilization clause in the contract,which can take dif ferent forms. An example from Liberia - Putu (2010), Section 14.3:

"The Government hereby agrees that with respect to those items set outin this Section 14.3 the rates and provis ions provided in this Agreementshall be fixed as of the Effective Date for the Term of this Ag reementbut not to exceed 15 years from the grant of the first Mining Li cense(which shall extend to the end of the fiscal year applic able to the Com -pany in which the 15 anniversary of the grant of the first Mining Licen-se occurs to the extent the anniversary does not fall on such date). . . Forthe avoidance of doubt, during such period, any fu ture amendment,additions, revisions, modifications or other changes to any Taxes andDuties (or the provisions or practice relating to any Taxes and Duties)applicable to the Company or the Operations that would have the ef-fect of im posing an additional or higher Tax or similar charge on theCompany or the Operations shall not apply to the ex tent it would re-quire the Company to pay such ad ditional or higher Tax or similar char-ge, including any future amendment, additions, revis ions, modifica-tions or other changes [..]"

This particular provis ion has two important features. First, it is li mited to specific por-tions of the fiscal regime and does not ex tend to other areas of the law such as healthand safety regulation, employment, or environmental regulation. Many stabilizationclauses in earli er contracts (some of which are still in force) are much broader and havebeen highly criticized for the negative impact on evolving social and general welfarepolicies, particularly given the long duration of many mining leases. They are some-

th

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times known as "freezing clauses" because they freeze new lawmaking in broad areas ofpublic policy. But secondly, with in the fisc al sphere, it does operate as an absolute barto applying high er charges to the company. It freezes the fiscal law.

As you can imagine, governments and the public do not react well to the idea that theirsovereignty should be inhibited for the interests of a foreign com pany, howev er muchmoney has been invested.

One alternative, more widely used today, moves the debate from law to money. An"economic equilibrium" clause basical ly says the state can pass any new laws it likes butcalls for negotiations between the parties if the changes have reduced the "economic in-terest" of the project to the investor, or, in its stronger form, requires the state to com-pensate the mining company to the extent required to restore the same state of pro-fitability. This is an example from an oil contra ct, though similar clauses can be found inmining contracts:

"If at any time after the Effective Date, there is any change in the legal,fiscal and/or economic framework under the Kurdistan Reg ion Law . . .which detrimentally affects the Contractor, the terms and conditions ofthe Contract shall be altered so as to restore the Contractor to the sameoverall economic position as that which Contractor would have been in,had no such change in the legal, fiscal and/or economic framework oc-curred."

The limitation on what is subject to stabilization and an af firmation of the primacy ofdomestic law on general economic and social policies is sometimes specifical ly addres-sed:

"Except as explicitly provided in this Agreement and the Revenue Code,the Company shall be subject to all of the internal laws of Liberia as ineffect from time to time, including with respect to labor, environment-al, health and safety, cus toms and tax matters."

Two other features of stabilization clauses are worth noting. First, they may contain so-called "one-way street” clauses that allow the investor to opt into any general reduc tionsin rates of taxation, without bearing the burden of any general rate increases -- a ques-tionable but not uncommon practice. Secondly, some countries, for example, Chile and

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Afghanistan, will provide stability but only if the inves tor agrees to a higher base taxrate, i.e., the in vestor has to pay for the additional assurance. Interestingly, no investorsin Chile have elected stabilization.

Lastly, sometimes in addition to and other times in lieu of stabilization, some contractsinclude provisions which allow either party to request consultations with respect to thecontract if there have been fundamental changes in circumstances. As an example, Li-berian mining contracts usually give the parties rights to request (but do not compel)revisions where there have been “Pro found Changes in Circumstances." From the Li beria- Putu (2010) min ing contract:

“Profound Changes in Circumstances” means such changes, since therelevant base period under Section 31.1, in the economic conditions ofthe mineral and mining industry worldwide or in Liberia, or such chan-ges in the economic, polit ical or social circumstances ex isting in Liberiaspecifical ly or elsewhere in the world at large as to result in such amaterial and fundamental altera tion of the condi tions, assumptionsand bases relied upon by the parties at such base period that the overallbalance of equit ies and benefits reasonably anticipated by them will nolonger as a practical matt er be achievable."

It is important to stress here that this is not an obligation to renegotiate by either party.It is only an obliga tion to sit together and talk. This is a weaker obligation than an ob-ligation to negotiate.

D O U B L E T A X T R E A T I E S

Another set of potential snares lie in internation al treaty obliga tions, and the way theycan affect contracts. For in stance, many countries have entered into bilateral “DoubleTaxation Treaties” in which two countries agree on how and when each will tax activit-ies of the residents (persons and legal en tities) of the other with respect to certain itemsof income. There are now more than 3,000 such treaties between the 200-odd jurisdic-tions around the world, although the number of treaties a co untry has can vary dras-tically.

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But with respect to mining law and contracts, these treaties can limit the government’spower to impose withholding taxes. Typically, double tax treaties will reduce the with-holding rates below those imposed by statute, sometimes to zero. Also, an investor canshop for intermediate jurisdictions which offer the strongest ad vantages from thesetreaties. For exam ple, even if the parent company of a local mining entity is based in Co-unt ry X, it may make loans to the project through a related entity in Co untry Y if it findsthat there is a tax treaty with Country Y providing for a zero withholding rate on in-terest. Tax treat ies may also limit the host government's ability to tax non-residents oncapital gains.

M O S T - F A V O R E D C O N T R A C T O R

There is also the question of treating all investors the same. Some contracts contain aprovision re quiring the government to extend to the contractor any benefits that thegovernment may extend to other in vestors in the future. Here is a typical example:

"In the event that the Government of Count ry A enters into a contract oragreement with a third party engaged in the mining or industrial sec-tors that, based on the laws in force in Country A at the time, af fordsmore favorable treatment with respect to the stabil ity of fiscal or othertax terms than have been granted to CopperCo under this MiningContract, the Parties agree that the Mining Contract shall be amendedto apply the more favorable treatment to CopperCo." [adapted fromunpublished contract]

Whatever the rationale for such clauses, they make it difficult for the government tochange its policies and contract terms over time to meet chang ing cir cumstan ces withinthe country, or to address the unique issues presented in a particular mine, or simply toupgrade their poli cies.

Consider the fol lowing: A government has entered into a contract with BackyardGoldmine providing for a 3% royalty and a 35% in come tax and including a “most-favored company” clause similar to the example above. But, a year later, it decides tomove in a new direc tion and wants to emphasize royalty payments in its fiscal regime. Itenters into an agreement with Backyard's competitor, Motherlode Resources Inc., call-

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ing for a 5% royal ty and a 25% income tax rate. It seems as though this could trigg er the“most-favored company” clause, and that Motherlode might pro test.

But it is actual ly only possible to compare the two fiscal regimes by financial model ingto demonstrate the effect over time of a higher royal ty coupled with a lower income tax.In some scenarios, overall revenues may go up, but in others, they may go down. It mayalso be impossible to make comparisons if the mines are very different (e.g., differentcosts structures, resource bases, etc.). These is sues raise the pro spect of a potentiallycontentious debate about the proper baseline to use for evaluating the net effect.

It is also possible that Backyard could argue (depending on how the “most-favoredcompany” clause is drafted) that it should benefit from the reduced tax rate, but keepthe agreed royalty rate. Could Motherlode come back and then claim that it should getthe same regime? The mere pos sibility of this highlights the problematic nature ofthese provisions, and it is easy to see how this would result in a gradual “ratchetingdown” of the fiscal regime that appl ies to com panies.

To avoid these problems, many contracts do not contain such clauses, or if included,they are li mited to companies in substantially similar circumstances.

T A X I N C E N T I V E S

Finally, a principal chal lenge facing policymakers and negotiators is how to capture anacceptable amount of revenue from mining—under a variety of economic circumstan-ces—while maintaining a regime that attracts the desired type of investor. One waythat count ries have attempted to walk this tightrope is by instituting a robust generalfiscal re gime but coupling it with a variety of specific tax incentives.

One old form of such incentives, still seen in many contracts, is to pro vide tax “holidays”in which the in vestor is freed from some or all taxes for a period of time. This can reallyslash government revenues. There have been occasions in which mines were developedand went into full production while a tax holiday was still on, leaving the govern mentwith no income tax revenue at all. It is hard to imagine any government seeking thatparticular outcome.

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Even in less extreme cases, holidays result in long postponement of government re-venue, well past the expiry of the tax holiday if depreciation and loss carry-forward ruleslet a company start writ ing off its expenses after the holiday is over. Moreov er, there isvery little evidence that such holidays - much less any incentive - are actually deter-minative of the decision to invest in extractive industries.

One alternative to the tax holiday which could also meet the investor concern of rapidrecovery of investment is accelerated depreciation rules. If the inves tor is allowed to de-duct a greater share of capital costs early in the life of the project, then there will begreater deferral of taxes. This type of provision at least ties the incentive to the actualcapital investment and avoids the pos sibil ity of taxes being sides tepped entirely (i.e.,the tax is deferred but not eliminated).

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H O W T O S P E N D I T

Once the state has collec ted the money from the various revenue tools in the fiscal re-gime, how the state should spend it becomes the burning ques tion. This sec tion focuseson how the state can obtain money from its min ing activities. The money should enablea government to pro vide the goods and services essenti al to the prosperity and growthof the co untry. A country can invest in state-of-the-art mining laws, mining contractsand revenue laws, but if the money flow is not used well, the effort could be was ted.

While this book is not about how to spend the money - that too could be a book unto it-self - the basic con siderations are clear. What governments seek to do is to convertwealth in the ground into wealth for their society.

Simply making the state's mineral revenues avail able to citizens, thereby increasing li v-ing standards, will not be sustainable because the mineral revenues will eventually runout when the minerals run out. This is a factor that drives government poli cy and com -pany strategy: minerals are finite resources that will not last forever. Even if a mine lasts100 years, it still runs out.

What this means is that governments have one shot at spending mineral revenues well.Most peo ple who have studied the challenge of sustainability conclude that statesshould invest as much as possible of their natural resource revenues to increase physicalinfrastructure, skills and labor productivity, and thereby bring about a sus tainable in-crease in the country's economy and in individual liv ing standards. In practice, thismeans beginning with the fundamentals: prima ry and secondary education, healthcare, basic transportation and, in most places, electricity supply and water supply andtreatment.

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Some count ries have made direct transfers of cash to citizens. Mongolia’s experi ence isdiscussed below. But attractive as direct cash transfers may be, governments in count-ries with weak ad ministration and high levels of illitera cy will need to consider the dif -ficulty of constructing systems to distribute that money fairly, efficiently, and withoutleakage.

Political pressures may also lead to campaigns to subsidize "es sential" consumerpurchases, like electric ity or gasoline or rice. This can improve living standards, but isdangerous beyond the very short run, as it can stimulate was teful consumption, lead tosmuggling (where tangible goods are invol ved), and, as experienced in many count ries,can be very hard to reverse.

H I G H P U B L I C E X P E C T A T I O N S , L O W R E V E N U E I N -F L O W

When the public learns of big mineral discoveries, or hears that a major IMC has cometo their co untry to negotiate a mining contract, public ex pec tations can shoot throughthe roof. There are many reasons for this, but polit ical reasons dominate. Politiciansmay rush to seek credit for the news and make inflated predictions of the im pact. Opt-imistic investor statements aimed at potential home country inves tors leak back to thehost co untry. Newspapers fan the flames with banner headlines.

The reality, of course, is that except for the occasional signing bonus and a small bumpin local employment when mine development begins, money will not start to flow untilthe mine goes into operation, many years later. Governments and civil society shouldanticipate this gap between expectations and reality, and should actively con trol expec-tations by keeping the public informed as to the progress of the mining sector andeducating the public about the time frames involved.

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This can be difficult to do, as it is tempting to take credit for each new discovery andeach new contract, and it is natural to present them as though the pot of gold at the endof the rainbow has been unveiled. A thoughtful, on-going effort to educate the publicand journalists about mining pro ject time lines and revenue expectations should help.If the non-political opinion leaders understand reality, the impact of over-exuberant orself-aggrandizing an nouncements can be reduced.

The Mongolian ExperienceFol low ing a major mineral discovery in Mongolia, the government created a HumanDevelopment Fund that was designed to function as a transfer of money to individualcitizens under a structure that would force most of the money into investments used tofund education, housing, health and pension plans over time, the type of ex penditureneeded for growth. Political pressures, spurred by populist political claims, resulted inthe promise of cash transfers to individual citizens in amounts that far ex ceeded thethen-existing mining revenue. The government had to fund the shortfall in the inter-national debt markets, where it was required to pledge future mine revenues to securethe loan.

This experience was so sober ing that Mongolia's political parties were able to agree

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upon a series of laws designed to limit the ab il ity of politicians to make impossible-to-fulfill promises. In summary form, the principal components of this effort were the fol-lowing:

The new Elec tion Law, adopted in 2011, prohibits political parties from including intheir election platforms, among other things, promises of cash, property, pro pertyrights, shares or endowments from proceeds of minerals and oil or pro mises thatare of a similar nature.

It also provides that if an election platform declares that the party involved willenact a new program with expenditure propos als, the expenditures proposed mustcomply with specific requirements of the budget stability law, and the compliancemust be verified and certified by the State Audit authority. (The law is online inMongolian at www.legalinfo.mn/law/, law 351.)

Laws like this, while difficult to follow (and which, inevitably, have not been strictly fol-lowed), can help to create a "cul ture of public prudence". Even in a co untry in which thepassage of similar laws can be difficult, a debate on the subject can educate peo ple ofthe risks of placing the appearance of large revenue gains before opportunistic memb-ers of the political class.

Bottomless Budget: Where to Stop?A country with a relatively small economy and major mineral deposits will have two dis-tinct budgeting problems. First, as soon as there is a major miner al discovery, there willbe a political in stinct to start spending the benefits. But, during the long period bet-ween discovery and operations, there is no cash flow. Any in creased expendi ture willhave to be fund ed by borrowing against the prospect of future mining revenues. This isalways dangerous for economic stabil ity, particularly when there are also pressures, asthere were in Mongolia, to dis tribute the funds directly to citizens.

Mongolia tried to limit this problem by adopting a budget stability law designed tolimit mineral-driven deficit spending. Article 6.1 pro vides that any budget deficit shouldbe limited to two percent, that budget increases must not ex ceed the average rate ofgrowth of the non-mineral sector, and that government debt must not exceed 40 per-cent of GDP. (The law is online in Mongolian at www.legalin fo.mn/law/, law 503.)

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Mongolia's experience, fol lowing adoption of this law, actual ly demonstrates that en-acting laws of this kind will be easi er than living within their limitations, but they docreate the basis for public discuss ion of the issues and affect the tone of legislative bud-get debates.

The second budgeting problem when mining does begin is learning to live with the factthat mineral revenues (and natural resource revenues general ly) are typically quite cycl-ical because of the volatility of commodity prices. This volatil ity can result in stop-and-go program funding, exces sive ex penditure commitments at the top of the revenuecycle and public uproar when budgets shrink at the bottom of the revenue cycle.

Chile, with an economy very dependent on co pper and molybdenum exports and anearlier histo ry of over-expenditure and boom-and-bust spending, tried to deal with thisissue early in this century. The core of the poli cy is the no tion of achieving "structuralbalance", which, in very rough terms, requires estimat ing the government income thatwould accrue if the overall impact of the economic cycle were levelized, and spendingno more than would be net of that levelized amount, even when actual revenues arehigher. In practice, this results in a surplus when revenues are up, which can be used tocover deficits when revenues are down. Chile built a large surplus after the pro gramtook effect, but then was able to use it during 2009 to maintain expendi tures throughthe internation al financial crisis.

Savings FundsA few countries will be fortunate enough to have large revenue flows which ex ceedtheir abil ity to use or “absorb” them in domestic spend ing. In addition, some countrieswant to hold some funds for future generations. The most well-known resource fund isthat of Norway.

Norway's fund, based on its petroleum income, had reached over $750 billion by late2013. It is man aged on behalf of the Ministry of Finance and invested outside of Norwayto avoid the in flationary impact of trying to invest all that money in Norway. Transfersfrom the fund to Norway's current budget are intended to be limited by the real returnon the fund.

Norway's fund is focused primarily on inter generational equity, en suring that a large

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portion of its oil revenues remain available to the country and its citizens after the oilruns out. This is appropriate for Norway, which is a highly developed country with asmall popula tion and a large oil surplus. It is not appropriate for an economy with largesocial and phys ical infrastruc ture deficiencies, except, perhaps, in the rare instance inwhich the population is very small in relation to the resource revenues.

E N V I R O N M E N T A L A N DS O C I A L I S S U E S

W H A T A R E T H E I S S U E S ?

U S I N G T H E C O N T R A C T T O M A N A G E T H E I S S U E S

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W H A T A R E T H E I S S U E S ?

Mining can be transformative, with a potentially enormous environmental and socialimpacts. This sec tion describes some of the environmental and social issues that canarise with min ing pro jects, as well as the contract pro visions that address those im-pacts. It also outlines some of the broader legal and policy frameworks that can apply toand help shape the impacts of a mine.

E N V I R O N M E N T A L I S S U E S

Mining is typical ly considered to have significant im pacts on the environment. Pollu-tion of land, water and air, strains on water and other natural resources, erosion, de-forestation, loss of habitat, and disruption of lives and livelihoods are among thenegative impacts that mining pro jects can have. What are the issues and how can theybe managed?

WaterThis is where the environmental impact of mining is often greatest. Pol lu tion and scarc-ity are the two major issues.

In tem perate or tropical climates, a key challenge is preventing infiltration of toxic ele-ments into the water table (such as mercury in artisan al or illeg al mining), which can re-sult even from surface mining and process ing operations because of high water tables.In parts of the world where water is scarce, the enorm ous consumption of water bymining ac tivities is the fundamental issue, lowering the water table and drying up rivers

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and lakes.

Whether through use, diversion, and/or pol lution, mining operations can potentiallystarve downstream or nearby com munities of the water they need, and destroy thefarm lands and other natural resources on which they depend.

The effect of the mine on water quality and availability, and whether sources of surfaceand groundwater will remain adequate and fit for humans, plants, and animals arecrucial questions; and the answers to these ques tions may determine whether a com -pany gets a min ing li cense. Accurate awareness of and anti cipation of these consequ-ences is a first step towards designing appropriate mechanisms to avoid or correctthem. It is no surprise therefore that companies like Rio Tinto and industry associationslike ICMM have recognized the importance of water impacts, issuing their own stan-dards and best practice guidelines for responsible water management.

Toxic Materials and Acid DrainageMining operations pro duce large quantities of solid and slurry waste. Different kinds ofwaste come at different stages in the process. First, there is the “overburden” and wasterock which has to be removed before you can get to the material to be mined. Whilethis material is not mineralized, or does not contain enough recoverable minerals to beproces sed, it has to be stored, typically on the sur face of the land but sometimes in ab-andoned mine pits or underground opera tions.

Understand ing the proportions is key. While iron ore typically contains upwards of 30-60% iron content, this is ex ceptional. Most metallic and preci ous minerals contain verysmall proportions of the mineral (typical ly less than 2%), which means the other 98% ofmaterial is waste. When you concentrate the ore or extract the metal, you create anoth-er major waste stream, called tailings. Tailings are not just about volume. Because theyare the waste product of ores that have been treated, this slurry can in clude heavy met -als, cyanide and chemical processing agents, sulfides, and sus pended solids which haveto be contained. Tailings storage therefore needs to be insulated, sometimes for de-cades, often well beyond the life of the mine, to allow decom position and settling. Ifthese facilities fail, the impact can be serious.

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Air PollutionTechnology has improved significantly but there can still be issues with airborne pollu-tion. Mining operations can generate a lot of dust, which can tri gger respirato ry dis-eases in people, and asphyxia of flora (plants). If the mine includes a smelting plant, gasemissions can also be toxic and a long-term risk for human life and health. This can be amajor problem around the older smelting operations, such as the lead-zinc smelters atBroken Hill in Australia, La Oroya in Peru, and the recently closed Herculaneum smelterin Missouri, USA. Depending on the quantity and concentration, these substances maycontribute to an increase in mortality or illness.

BiodiversityMining can impact biodiversity by changing the relative populations of species in thesame ecosystem, as some species are more tolerant than others to land disturbance,loss of habitat and exposure to high metals and acid. While wholesale habitat destruc-tion might be relatively rare, there is also the issue of habitat fragmentation.

The Local Effects of Noise, Vib rations and Blast ingThese can impact the stability of infrastructure, buildings, and homes of people li vingnear mining operations, as well as people’s peace and tranquility.

Rehabilitation of Mined AreasThe global trend in mining is towards what is called “pro gres sive reclamation,” meaningthat dis turbed areas become reclaimed during the life of the mine as well as after it hasclosed. Closure itself is now often planned and designed from project start-up in orderto make reclamation easier and more success ful. The trick is to monitor what happensright from the be ginning and ensure that mechanisms are in place to guarantee thatthe eventual cost of rehabilita tion is adequately funded.

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S O C I A L I S S U E S

The social im pact of min ing pro jects can be serious and com plicated, particularly whenmining takes place in loca tions where people are already liv ing. Mining can serious lydisrupt community stability and distort or damage local economies and livelihoods. Inseveral countries, the beginn ing of a large mining project has been documented to im -pact the economy of a town or commun ity, and bring problems such as prostitution,drugs and crime.

Historically, the costs of mining have been borne largely by the directly af fectedpopulations while the benefits have tended to accrue to the national government,select elites or the private sector. Social impacts at the local level may therefore be quitedifferent than at the nation al (or international) level - a scenario that can lead to tens -ions, conflicts and instability.

In the last decade, the avoidance and mitigation of negative social impacts have cometo be seen as critically important. When properly managed, social impacts of a minecan even be positive.

Land Acquisi tion and Resettle ment IssuesLand acquisition is a common and significant cause of resentment and conflict as -sociated with large mining projects, related especially to the amount and type of landused and the way in which it is acquired. In addition to land being needed at the mine-site, it can also be required to es tablish transport corridors and transmission lines, aswell as around new or upgraded port facilities needed by the mine.

In many cases, en tire communit ies or significant parts of them may have to be movedelsewhere. This involves the physical relocation of households and their real as sets, butcan also lead to their “economic dis placement”, that is, the loss of their li velihoods andincome sources, which must be re-established or re-created in their new locations. Themajor risk of resettlement, voluntary or involuntary, is the potenti al to impoverish com-munities and leave them worse off than they were before the mine necessitated theirrelocation.

In addition to creat ing chal lenges for resettled people, resettlement can also be difficult

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for the places and communities that receive them. Alternatively, new purpose-builtsettlements may need to be built, but these might not meet needs. For example, thehouses built and the lands allocated may not allow for fami ly growth, or even the re-storation of incomes or livelihoods. People may have to change their livelihoods inorder to survive. Particularly challenging can be the displacement of indigenous peo plethat have cultural ties to the land, and a single defined livelihood.

There are also situations where artisanal miners, often regarded as barefoot prospec-tors and finders of new mineral deposits, are mining in areas where IMCs have appliedfor exploration and/or mining permits. The displacement of artisanal miners, who oftenwork areas without legal authority, poses a different kind of challenge to governmentsand IMCs. This often has led to confrontations and conflict between IMCs and artisanalminers, and between artisanal miners and the government.

Companies traditionally held much wider sway on these issues. The relocation ofpopulations has in the past been carried out by the government or the IMC with theapproval of the government. But there is now a growing expectation locally, national lyand internationally, that these processes will be done in consultation with the affectedcommunit ies and in a participatory way, and will include post-resettlement follow-upand on going IMC or government support to the resettled people. Many IMCs and lend-ers now subscribe to the IFC’s Performance Standard 5 on Land Acquisi tion and Involun-tary Resettlement, which lays out an ex plicit framework for consulta tion, planning, im-plementation and monitoring of resettlement, including income re storation.

Additional ly, resettlement of indigenous peoples is addres sed in IFC Perfor mance Stan -dard 7, which states that indigenous peoples can only be resettled with their consent.

Governments may also need to clarify their own approach to and responsibilities re -garding resettlement, which may be defined in the mining contract but can also begoverned by other legal rules, including under international law.

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Inward MigrationNew mining projects, particularly in economically depressed regions or countries, oftenlead to an influx of newcomers from outside the area looking for jobs on the project, orto set up businesses to profit from the new economic activity. As a high-value activ ity,mining generates support and service jobs, and if it tri ggers better infrastructure, thatcan be a further people-attractor.

At a logistical level, a sudden increase in population can lead to added pressures onwater, land, hous ing and other resources, as well as existing public infrastructure andsocial services, includ ing sanitation, health and education services. There may be othernegative "boomtown" effects. Social co hesion within the com munity may bethreatened. Disease, substance abuse, dis ruptions in law and order, and soci al conflictmay become major problems. Uncontrolled population influx can have a profound im -pact on the original inhabitants, and on the social and political stability of the area. Themanagement of influx risks is now recognized as a major challenge for responsiblemine development. Here too, forward thinking IMCs will develop and im plementworkforce recruitment and housing strategies that minimize these risks, and de velopother policies and procedures in collaboration with local government and national aut-horities to keep in-migration under control.

LivelihoodsMining can affect peoples’ livelihoods in a variety of ways - both positive and negative. Ifthe people in the area depend on local natural resources for their subsistence (hunting,fishing, farming, or peasant mining), exploration activities, site preparation, mine andplant construction, infrastructure development, and mine operations may interrupt, in-terfere with or pre vent them from accessing these resources and continuing their waysof supporting themselves and their families. This has been referred to above as“economic displacement”, which can occur even when communities and households donot have to be shifted.

The main compen satory measures that IMC’s and governments can take are to ensurethe creation of alternative livelihood and employment opportunities for famil ies andindividuals. This has often involved preferential training and hiring policies, as well asinvestment in local business development and the sourcing of certain goods and suppl-ies that may be available locally. Some governments have built preferenti al national

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hiring and pro curement provisions into their mining ag reements, but these have notnecessarily filtered down to the local level. There are, however, renewed ef forts in thisdirection, as many companies and governments re cognize the need to ensure secureand stable communities in the mining area, and are designing and im plementing localemployment and procurement policies and procedures.

Cultur al Heritage and Sac red SitesLand acquisition, earthmoving activities, and popula tion influx can all threaten accessto and the protection and preservation of cul tural sites, whether of archeological orspiritual significance. Where cul tural sites are present, IMCs, often obligated by nation-al laws, undertake surveys, and where needed, implement protective measures andmanagement systems. This issue may also be addres sed in the mining investment ag -reement.

Physical and Social Infrastruc tureOne of the potential benefits of a mine’s presence is its investment in the improvementof local infrastructure and services. IMCs often per form public service functions in theabsence of robust public services in order to as sist local communities to meet basicneeds and improve quality of life.

Some IMCs take a strategic approach to social/com munity investment, and promotepublic-private partnerships for local development, partnering with different levels ofgovernment, communities and NGOs, sometimes with additional fund ing from multi-or bi-lateral aid agen cies. However, the roles and responsibilities, as well as the expec-tations of all parties to the mining contract (or other relevant agreements) in thisdomain should be made clear during negotiations and com munity consultation whenthey occur, and for malized with in the agreement(s).

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Financial Benefit SharingSince impacts are un equ ally borne, there is an increasing ex pectation that the peopleand communities most directly affected will share in the benefits generated by the pre-sence of a mining operation. These benefits may not be li mited to employ ment andbusiness opportunities, improved infrastructure and services, but may also relate to fin-ancial benefit sharing, for ex ample, a return of a portion of national government royalt-ies to the local municipal or regional authorities. This is an issue that is also beingaddressed in con temporary agreements, which may mandate financi al contributions bythe IMC directly or by the central government back to the local authorities.

Equity IssuesA major challenge is in re duc ing the risk of creating new divisions between social oreconomic classes of peo ple within the af fected communities. The mine will have dif-ferential impacts on different groups within the community, and the benefits of em -ploy ment or business may not be evenly distributed. Consultation proces ses may not beinclusive and, as a result, community investment decisions and partnerships may favorselect groups. Disparit ies can be widened and power and soci al relationships within acommunity distorted. IMCs, governments and other partners should be attentive tothese risks.

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U S I N G T H E C O N T R A C T T OM A N A G E T H E I S S U E S

The environmental and social impacts that mining pro jects can have will vary over thecourse of the projects' life cycles; and different parts of the contract can be used to af fectthose impacts - for better or worse.

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This section provides exam ples of how contracts can address some of these issues.While these examples primarily describe obligations placed upon a mining company,this does not mean that the government is free from responsibility. Even if there are noprovisions in the contract placing environment al or soci al obligations on the govern-ment, the government does have relevant responsibilities under international law.These is sues are described briefly in the third chapter of this section.

T H E H E A R T O F T H E M A T T E R : E N V I R O N M E N T A L A N DS O C I A L I M P A C T A S S E S S M E N T S ( E S I A ) A N D E N V I R O N -M E N T A L M A N A G E M E N T P L A N S ( E M P )

The planning phase is the most important phase for influencing what a mining projectwill look like and what impacts it will have. As plans for exploration, ex ploitation andclosure are developed (and revised), there is a crucial opportunity for taking stock of en-vironmental and social risks, figuring out how to avoid or mitigate pro blems, and de-signing the project and op erations accordingly.

This pro cess is the "environ mental and social impact as sessment" (ESIA).

ESIAs are fund amental pre-project planning tools used to make sure a wide range ofpotential en vironment al and social implications are considered before the pro ject isformally approved. They provide an opportunity to mold or even halt projects based ontheir findings.

Traditionally, these assessments have analyzed the environmental features of a project-affected area and the potential impact of that pro ject, surveying the plants, an im als, airquality, water use and water availabil ity, and assessing the potenti al effects of the pro -ject on those resources and associated communities (these assess ments are called "En-vironmental Impact Assessments" (EIAs)). However, the assess ments increasingly lookat broader project-related issues, and require consideration not only of the environ-ment, but also detailed analysis of impacts on communities and socioeconomic is sues.

In Australia, for example, the state of Queensland re cently passed regulations requiringmore extensive social baseline work and social impact management planning in ad-vance of permit approvals. The regula tions call for data to be gathered on categories

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such as community history and culture, income and cost of li ving, population, social in-frastructure, workforce participation, employment and diversity pro file, housing andaccommodation, education and training, and transportation. Everyth ing from the priceof houses and mortgages to the nature of local labor markets, to public transport couldbe relevant to these impact assess ments.

An ESIA often describes alternative forms of the project (including even a "no project"alternative), and lists different opt ions for avoiding or mitigating pos sible negative im-pacts. The level of detail required in an ESIA commonly depends on the nature of theproposed project. Given mines' heavy footprint, ESIAs for mines are mostly done to themost de manding standards.

Domestic law may require companies to pre pare an ESIA or at least to secure relevantapprovals and permits before pro ceed ing with a min ing project, but when that is notthe case, ESIA provisions in contra cts can ensure that they are required. Additionally,even if the requirement for an ESIA is al ready in the law, there may be reasons why agovernment would also want to include the obligation in the contract: By putting therequirement for the ESIA in the contra ct, the government can reinforce the messagethat a company's obligations to pro perly prepare or pro cure the ESIA is viewed as afundamental part of the deal. If there were a viola tion regarding how the ESIA was pre-pared, the contract could provide for specific penalties and remedies that might not beotherwise available under domestic law.

The ESIA pro cess can contain various phases, including:

preparation of a draft ESIA (which may be done by the project developer, relevantgovernmental aut hority, and/or independent firm);

consul tation with the community in the drafting of the ESIA;

a period in which the public can review and com ment on the draft;

revision of the ESIA based on the comments by stakehold ers, including the publicand the company;

preparation of the final ESIA; and

selection of a project plan with a course of action and strategies for avoiding or

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mitigat ing harm.

In some jurisdictions, citizens have the ability to chal lenge the ESIA and resulting decis-ions in court.

How ESIAs are undertaken is vital for determining whether, to what ex tent, and howenvironmental and social impacts are anticipated and - to the extent possible - avoided.Without the proper independence, oversight, and integration into decision-makingproces ses, the ESIA has no practical value.

Some ag reements, like Guinea - Zogota (2009), require the company to prepare theESIA.

Others, like the Mon golia - Oyu Tolgoi (2009) contract (Article 6.1), specify that thecompany "shall obtain detailed environmental impact assessment reports ... in ac-cordance with the Law on Environmental Impact Assessment prepared by a competent,independent, professional firm.”

Some mining contracts indicate that the government must approve ESIAs, althoughmost contracts do not specify the requirements for the scope of the ESIA or the processfor its approval.

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L I N K I N G A S S E S S M E N T , P L A N N I N G A N D M A N A G E -M E N T : T H E E N V I R O N M E N T A L M A N A G E M E N T P L A N

Assessment means nothing if the information is gathered but not actually used inplanning the project, mak ing decisions, or implement ing strateg ies. This is where en-vironmental (and social) management plans come in (referred to here as "EMPs"). Theseplans present a fuller picture of how the relationship among the project, the en viron-ment and surrounding communities is being handled through the life of the projectfrom exploration through mine closure.

In com parison with ESIAs, EMPs focus less on the planning or design phase and moreon manage ment of environmental impacts and compliance with relevant permits andapprovals. In some cases, EMPs require com pliance with findings of an ESIA. In othercases, however, the precise relationship between the ESIA and the EMP is less clear.

Some important questions the contract might answer regarding the EMP are whetherthe EMP has to take into account all categories of issues co vered in the ESIA, or whetherit requires the company and/or the government to mitigate (at any cost) the risks iden-tified in the ESIA.

The Mongolia - Oyu Tolgoi (2009) contract, for example, requires the inves tor to im ple-ment an "en vironmental protection plan ('EPP') and environmental monitoring and an-alysis pro gram," but does not link it express ly with the required environmental im pactassessment. It states:

"6.4. The Investor shall meet all costs for each year of im plementing anenvironmental protection plan ("EPP") and environmental monitoringand analysis program, in connection with implementation of the OTProject and shall provide to the State central administrative authorityin charge of environment a report, prepared by a certified, indepen -dent, profes sional firm, on addressing the In vestor's im plementation ofthe measures specified in the EPP every 3 (three) years."

While the Mongolian agreement sees the assessment and the plan as two separatedocuments, other agreements assume that the ESIA itself sets out an ac tion plan thatthe com pany must comply with. For instance, Article 12.2 of the Ecuador - Ecuacorriente

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(2012) contract states:

"El Concesionario Minario tomara las precauciones necesarias, y es -tablecidas en el EIA aprobado, para prevenir, controlar, mitigar, re-habilitar, remediar y compensar los impac tos negativos que sus ac-tividades mineras puedan tener sobre el ambiente y la com unidad."

[The Mining Conces sionaire will take the neces sary precautions, es -tablished in the approved EIA to prevent, control, mitigate, re-habilitate, remediate and compen sate for the negative im pact that itsmining ac tivities can have on the environment and the community.]

Similarly, Article 1.10 of the Afghanistan - Qara Zaghan (2011) ag reement defines thegold mining project's Environmental and Social Management Plan as a:

"... plan proposed by [the company], and which must be accepted by[the Ministry of Mines], which details the measures to be taken tominimize or alleviate the Environmental and Social factors applicableto the Qara Zaghan Gold Project which are identified and detailed inthe Environmental and Social Impact Assessment."

The Sierra Leone - MMDA (2012) provides yet another example and, as com pared to theagreements quoted above, is relatively specific regarding what it must contain andwhat the company is supposed to do. It states:

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"The Company, prior to commencing construction, shall have an En-vironmental Management Plan prepared (and updated prior to anymajor change to the mine plan) by an independent third-party (and ifprepared by the Company, verified by an Independent Sole Ex pert) onthe basis of sound engineering and economic principles in accordancewith Good Industry Practice. The objective of the Environmental Man-agement Plan is to prevent any unneces sary and undue degradation ofthe environment by the Mining Operations; to protect public healthand safety, particularly for communities in the Mining Area; to preservewater quantity and quality; to ensure that impacts within the MiningArea are contained in that area; to stabil ize the site physically andchemically at the end of mining operations to prevent offsite im pacts;and to en sure that the Mining Area may be safely and beneficial ly usedby future generations. The Environmental Management Plan shallupon request by GoSL, be made publicly available in a language and ina form that is accessible to affected communities in the Mining Area,and shall be placed in the document files identified in Section 35.1(e) ofthis Agreement." (Article 2.6.1(a)).

The agreement also includes a list of topics that must be covered in the EnvironmentalManagement Plan, and specifies what is required in order to comply with "Good Indust-ry Practice". This, the agreement ex plains, is:

"… the exercise of that degree of skill, diligence, prudence and foresightwhich would reasonably and ordinarily be expected to be applied by askilled and experienced person engaged in the international mining in-dustry and in cludes but is not limited to the guidance provided by theInternational Council on Mining and Met als, the International FinanceCorporation’s Performance Standard 1 (Soci al and Environmental As-sessment and Management Systems), Standard 3 (Pollution Preven tionand Abatement), and Standard 6 (Biodivers ity Conservation and Sus-tainable Natural Resource Management), by ISO 140001 standards."(Article 1.4).

These tools (the ESIA pro cess) and plans (the EMP) are central to determin ing the ex-tent to which a mining project will facilitate long-term sustainable development, or

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leave the count ry with a legacy of social and environmental pro blems.

D R I L L I N G D O W N O N S P E C I F I C I S S U E S : A C C E S S T OR E S O U R C E S , W O R K P L A C E S A F E T Y , S E C U R I T Y , C U L -T U R A L H E R I T A G E , M I N E C L O S U R E A N D L I A B I L I T Y

While it is vital for the ESIA and the EMP to be as comprehensive as possible, there maybe certain issues to which the contracting part ies want to give additional speci al atten-tion. Experiences have shown that mining projects give rise to tensions over access toand use of resources, issues regarding workplace safety, conflicts between communitiesand security forces, and concerns re garding ensur ing that - if something does go wrong- the problem can be sol ved at the appropriate party's expense. There is also increasedaware ness of the opportunities that mining projects can present for community de-velopment. Some contracts contain special provisions on these topics in order to makeclear what the parties' rights and obligations are; and some do this in order to ensurethat a breach of the obliga tion also constitutes a breach of the contract with real con-sequences for the parties.

This sec tion provides exam ples of some of those provis ions.

A C C E S S T O L A N D , W A T E R A N D O T H E R R E S O U R C E S

One critical early-project issue relates to access to resources. To access minerals youmust have access to land and water; the access to and use of those resources can havesignificant impacts on sur rounding ecosystems.

Some contracts state explicitly, or imply through their silence, that a company's accessto and use of land, water and other resources will be governed by general backgroundprinciples of law regard ing mineral rights, water rights, land rights and environmentalprotection. Under these contracts, the company will have to secure relevant ac cess andapprovals consis tent with those laws - a process that, in many jurisdictions, is oftencited as being lengthy, complex and costly.

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Some contracts seek to bypass those processes and constraints by facilitating (or evenpromising) mining companies' abilit ies to use or affect water, land or other natural re-sources. At one ex treme, a government may grant a company these rights in broad ifnot absolute terms. Other contracts take a more restrained approach by imposing ob-ligations, such as fees and/or restrictions on the amount or scope of use. Regardingwater use, for example, the Liberia - Putu (2010) agreement states in Article 19.5:

"The Com pany shall have the right to access (including by means ofextraction) such water suppl ies as are reasonably required by it for thepurposes of carrying out its [ex plora tion, development, produc tion andother operations] subject to the payment by the Com pany of the char-ges required by applicable Law for the use of water and pro vided thatsuch access by the Company does not affect the water supplies used bythe surround ing population or, to the extent that it does so affect watersupplies, the Company provides an alter native source of water supplyto the affected population."

That provis ion illustrates how a contra ct can impose certain limits on the com pany's useof water in order to take into account other users, uses and interests. But it also showshow contracts leave a number of environmental and soci al issues unresolved. It doesnot, for exam ple, place any limits on the use of water that may im pact the environment(as opposed to the popula tion); nor does it clearly address who is the "surround ing"population who may be entit led to receive "alternative" sources of water supply.

Issues around land access can be just as contentious. Awarding rights to access land tothe mining company by the government, for instance, may not take account of cus-tomary land rights held by local communities.

As was noted above, one of the most sensitive aspects of mining projects is when the es-tablishment of a mine requires local residents to be relocated for operations. As a re-sult, requirements as to the handl ing of resettlement are increasingly li kely to be foundin mining contracts.

The Sierra Leone - Sierra Rutile (2001) contract (Article 10.b.v) has a long section dealingwith this issue. But it does not categorically state whether residents have a right to re-fuse to move:

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"If at any point a resettlement of the local population appears to be ab-solutely essential, the Company shall move with utmost cau tion, withthe consent of the Government and in consulta tion with local authorit-ies in persuading the local population to resettle and pro vide a fullyadequate resettle ment pro gram in accordance with the direc tions ofthe responsible Minister."

So what happens if, despite pro ceeding with "utmost caution" and of fering a "fullyadequate re settlement program," the local population or individuals refuse to move?

The Sierra Leone contract clearly specifies that the central government has the final sayin adjudicating between a company and an individual landowner for use of the land. Sodoes the Liberia - Putu (2010) agreement, which states (Article 7.3.a):

"If no other surface rights are rea sonably available to the Company forsuch purposes, the Government will use its pow ers of em inent domainto obtain such rights from an unwilling third party."

In the Guinea - Koumbia (2010) contra ct, it is assumed that the com pany will be able tomove residents if it has to. The agreement simply lays down condi tions (Article 15.8) forhow it must do so:

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"Si la Société juge la pres ence d'Utilisateurs et/ou Occupants Fonciersincompatible avec ses Operations Minieres sous la Concession Miniere,elle est tenue d'indemniser ces Utilisateurs et/ou Occupants Fonciersavant la date de signature de la Convention et de les aider a se relocalis-er. La Societe doit verser une indemnite a ces Utilisateurs et/ou Oc-cupants Fonciers, pour toute relocalisation ou pour toute perte d'usage,titre fon cier, habitation et recol tes. L'indemnisa tion susmentionee doitcorrespondre au montant necessaire a la relocalisation et a la reinstal-lation des dits Utilisateurs et/ou Occupants Fonciers... (et) doit com-prendre la juste valeur marchande de toute perte."

[If the Com pany judges the presence of Users incom patible with itsmining op erations under the Mining Concession, it must indemnifythese Users before the date of signature of the ag reement and to helpthem relocate. The Company must disburse an indemnity to the Usersfor every resettlement or for every loss of use, habitation and crops. Theabove-mentioned indemnity must corres pond to the amount necessa-ry to relocate and reinstall the said Users and must encom pass the fairmarket value of every loss.]

O C C U P A T I O N A L H E A L T H A N D S A F E T Y

Contractual terms detailing mining company respon sibilities for occupational healthand safety around mining operations are relatively common. Health and safety issuesare covered in legislation in most count ries, and many mining contracts will simply notethat the mining company is bound to pro vide adequate protections in line with the lawand with internation al standards. For ex ample, the Li beria - Western Cluster (2011)contract notes that the company:

"...[s]hall practice such modern health and safety procedures and pre-cautions (including regular safety training instruction for its em -ployees) as are in accordance with applicable Law and InternationalMining Standards."

The Sierra Leone - MMDA (2012) similarly requires the com pany to adhere to “good in-

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dustry practice” regard ing labor, health, and safety. (Articles 16.5 & 16.6).

S E C U R I T Y

Security is an im portant and sensitive issue. The mine needs security for its personneland operations, but questions arise regarding who has re sponsibility for security, whatthe mine's rights are to have its own security forces, what pro tections are availableagainst abuses, and other issues.

There are a number of dif ferent ways a contract might seek to resolve these questions.In some cases, mines may be entitled to maintain secur ity forces but must im mediatelyturn over any detained individuals to the authorities. In other cases, mines are not per-mitted to maintain armed security personnel, and the govern ment takes on the obliga-tions of providing in ternal security.

The Liberia - Africa Aura Resources (2004) agreement notes that the project is not con-sidered to have started until a joint visit by the government and company offici als hasdetermined that the site is safe. It even specifies (Article 27) that the company should be“under the guidan ce” of the United Nations of fice in Mon rovia and says the com panyshall make “all reasonable efforts to accept a 'safe to operate in' declaration.”

But the Liberia - China Union (2009) contract goes much further in giving the companypower. It explicitly allows (Article 9.2) the company to form its own security force to op-erate on the min ing concession areas and “the immediate vicinity”:

"Those members of the Concessionaire's (or such contractor's) securityforce certified by name by the Concessionaire to the Minist ry of Justiceas being literate, as having received adequate full-time train ing inpolice and law enforcement procedures given by an outside trainersatisfacto ry to the Ministry of Justice and as having been pro vided withoperating manuals approved by the Ministry of Justice, shall have en-forcement powers within the areas described in the preceding sent-ence, always being subject to applicable Law."

These powers in clude rights to search and arrest individuals, though the agreement

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specifies that the company's security force must notify the police within 24 hours of anydetentions.

In addition to granting rights, the contract can also include obligations on the miningcompany to utilize them sensitively in recognition of com munity and basic humanrights. It appears to still be unusual to see this spelled out in a contract, but there arenow some ex amples. Section 9.2 of the Liberia - Western Cluster (2011) contract, for ex -ample, specifies that the firm’s security force is subject to both applicable law and theVoluntary Prin ciples on Security and Human Rights (see the next chapter for more de-tails on the Voluntary Princi ples).

M I N E C L O S U R E

What happens when the contract terminates? Will the country be left with an unusableand potentially hazardous wasteland? In order to avoid that outcome, countries can in-clude specific obligations related to mine closure in their contracts. The mining com-pany will be asked to provide plans and cost es timates for rehabilitation of the mine site– usual ly built into the EMP. Some contracts may require additional guarantees of fin-ancing that will be available if there are major environment al problems that requirecleanup. These may be one of several “parental guarantees” requiring the company todemonstrate it can mobil ize additional funding as needed. For ex ample, Liberia’sModel Mineral Development Agreement (2008) states:

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"The closure management plan must also set forth the means by whichthe Company proposes to ensure the availability of funds to finance itsenvironmental restoration and remediation obligations under Sections8.2 and 8.3 of the Mining Law so that the cost of closure will be borne bythe Company and not the public or the Government. If the Com panydoes not agree in writing with the Government to a “pay-as-you-go”funding scheme, then a funding guarantee reasonably satisfactory tothe Minister of Finance from a third party fin ancial institution with along-term credit rating of at least A (or its equivalent) from at least twointernational ly re cognized credit-rating agencies with provision rea-sonably acceptable to the Minister of Finance and the Minister for re-determination of estimated closure costs at least triennially and adjust-ments in the amount of the funding guarantee will normally be accept-able."

It is important to remember that some environmental issues, such as tail ings ponds,will have to be managed years after the mine may close so that some permanent fund-ing sour ce may be required. For more on mine closure, see the chapter on "MineClosure" in the section, "Min ing Operations".

C O M M U N I T Y D E V E L O P M E N T

Contracts increasingly require companies to provide services to affected com munities,in part due to broader recognition of the economic and social disruption that a minecan create alongside economic opportunities.

These provis ions typically take the form of terms detailing commitments to supportcommunity development, at least on the part of the mining com pany. These may be assimple as stating finan cial compensation to be provided. The contra ct for Afghanistan -Qara Zaghan (2011) is re latively straightforward. It states that "[d]uring the first twoyears of [the] contract [the company] shall spend a minimum of US$50,000 for im-plementation of social programs as per the Social Development Plan.” (Article 31).

Who decides the use of such funds? Sometimes it is specified. Sometimes it is left am-biguous. The Sierra Leone - Sierra Rutile (2011) contract pro vides some information on

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that issue. It notes:

"The company shall with effect from the financial year com mencingJanuary 1, 2003 ... make payment to the Ag ricultural DevelopmentFund of the higher of US$75,000 and 0.1% (one tenth of one percent) ofgross sales free alongside ship the Sierra Leone port of shipment in Uni-ted States Dollars or its Leone equivalent. The Fund shall be utilised forthe development of agriculture in the affected areas and shall be con-trolled by representatives of the Government, Chiefdom represen-tatives and the Company’s represen tatives.”

But even where contracts achieve some degree of specificity, there may be ques tionsamong affected communities as to who can legally and credibly act as their agentnegotiating and securing benefits.

Some contracts con tain much broader community development-related com mitments.Often these are integrated with provisions related to local economic development andcorporate social responsibil ity. The Mongolia - Oyu Tolgoi (2009) contract is broad in itscoverage of such issues (Article 4). In the agreement, the government com mits to es-tablishing a multi-stakeholder “Southern Gobi Regional Development Co uncil” to helpdeal with local governance, migration, infrastructure, training, social service provisionand capacity building. The investor is required to be a mem ber of this Co uncil’s govern-ing board and support its activit ies.

The agreement also im poses requirements on how the inves tor engages with otherstakehold ers, such as obliga tions to conduct all of its “socio-economic developmentprograms and activities based on principles of transparency, accountability and pub licparticipation” and to maintain “pro ductive working relationships … with non-governmental organizations, civic groups, civil councils and other stakeholders.”

A contract may also require the mining com pany to go the extra step of negotiating acommunity development agreement, or affirm that such a requirement exists underthe law. Such agreements, which are discussed in de tail in the next chapter, usually out-line the size and nature of corporate contributions to local li velihoods and provide aframework for managing such contributions and for ongoing dialogue. Again, the Mon-golia - Oyu Tolgoi (2009) contract states:

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"The In vestor shall establish cooperation ag reements with local ad-ministrative organizations in accordance with Article 42 of the MineralsLaw and these ag reements may include the establishment of local de-velopment and participation funds, local participation commit tees andlocal en vironmental monitoring committees."

Managing commun ity relationships continues to be one of the most dif ficult challengesof mining projects. A number of resources are available to provide guidance to com pan-ies, governments and communities, including ICMM tool kits, IFC principles and stan-dards, the IBA Community Toolkit, and guidance from the University of Queensland’sCentre Social Responsibility in Mining (CSRM), such as their recent (2013) practitionerguide on Commun ity Relations.

C U L T U R A L H E R I T A G E

Mining necessarily disturbs the ground. Not only does this mean disruption of currentor potential uses of the land, but ex posing the legacy of past uses. There is the risk ofdiscover ing or disturbing culturally significant artifacts. How will miners recogn izewhat might be significant? What do they do?

These are also among the types of issues now co vered under industry good practiceguidelines, such as the IFC’s Per formance Standards and ICMM principles (see the nextchapter for more details). It is not common to find provisions dealing with these issuesin the contracts themselves, but there are ex amples.

The Afghanis tan - Qara Zaghan (2011) contract anticipates this (Article 28), and tries toensure that the government is quickly notified of any dis covery:

"If, during prospecting, ex ploration, and mining, any historical or cul -tural artifacts, monuments, buried treasures and (noble metals andnon-noble metals) are found, these historic items and works (accord ingto the applicable laws of Afghanis tan) will be long to the government. IfAKNR, during its operations becomes aware of the ex istence of thiskind of treasure or monuments, AKNR is bound to inform the Ministryof Mines and Minist ry of Culture within 24 hours."

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The Guinea - Simfer (2002) agreement provides more detailed instruction to the com -pany regarding what it can and cannot do after it discovers an archeological site (Article37.4):

"En cas de découverte d’un site archéologique, la phase d’exploitationdevra être précédé aux frais de SIMFER S.A. et en accord avec l’Etat, pardes études appropriées menées par les services compétents a l’interieurdu Périmetre d’Exploitation.

S’il venait à être mis a jour des elements du patrimonie culturel nation-al, meubles ou immeubles, au cours des activités de recherche, SIMF ERS.A. s’engage à ne pas deplacer ces objets, et à informer sans délais lesauto rités administratives. SIMFER S.A. s’engage à participer aux frais desauvetage raisonnables."

[If an archaeological site is dis covered, the exploration phase must bepreceded, at the expense of SIMF ER S.A. and by the ag reement of theState, by appropriate studies led by competent agencies within the per-imet er of ex ploitation.

If elements of cultural patrimony come to light, whether fixed or mov-able, during the course of research, SIMF ER S.A. com mits to not dis-placing objects and to inform ing the administrative authorit ies. SIMF-ER S.A. commits to sharing in reasonable salvage costs.]

W H E N T H I N G S G O W R O N G - C O V E R I N G L I A B I L I T YF O R H A R M

Things can and sometimes do go wrong in mining operations. Environmental and soci-al obligations may be knowingly or negligently breached; unknown and unforeseen im-pacts and challenges may arise; plans may chan ge; and ex pectations may be frustrated.Contracts generally attempt to address these issues in ad vance by determining who willbe responsible for what.

In terms of en vironmental problems, as noted above in connection with mine closure,

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contracts typically require finan cial guarantees to cover necessary cleanup. One variantof such guarantees is to require the mining company to post an environmental bond,where they set aside funds up front that are held in escrow explicitly for rehabilitation.They are only drawn upon if needed. If not, they are returned to the mining companyupon completion of the pro ject.

In the Mon golia - Oyu Tolgoi (2009) contract, the parties use this type of advance-payment system in order to help ensure that there are funds available for routine en-vironmental man agement and cleanup, and not just closure. It states:

"The In vestor shall deposit funds equivalent to 50% (fifty percent) of itsenvironmental protection cost for the particular year, prior to the startof that year into a bank account established by the State central ad-ministrative authority in charge of environment." (Article 6.6).

The company will use that money if necessary to com ply with its environmental man-agement obligations. If the money runs out and the company still has work to do, en-vironmental experts can require the company to do or pay more. (Article 6.12).

In the event of a significant or catastrophic environ mental mishap or accident, the crit-ical issue will be how to make sure there is money to fix the problem. How can thecontract help en sure that costs of mitigation, remediation and restoration are met?That injuries are com pensated? In addition to requiring com panies to post bonds, paydeposits into dedicated funds, or secure guarantees from a parent company or other in-stitution, some contracts contain pro vis ions requiring companies to obtain insurancefor environmental or, more typical ly, general liabilities. Including these obligations -and ensuring they are complied with - can be particularly im portant to protect thegovernment in cases where the company that is party to the contra ct lacks significantassets or balan ce sheet strength.

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W H E N T H I N G S G O W R O N G - L I A B I L I T Y F O R H A R M ST O N O N - P A R T I E S

As noted above and in other chapters, some contracts require companies to do or to notdo things, in order to shape their impacts on the environment, surround ing com munit-ies, and other non-parties to the contract, such as individual em ployees. The pro vis ionin the Liberia - Putu (2010) contract requiring the company to limit its use or pro vide al -ternative water to surrounding communities is an example.

Under some countries’ laws, that type of requirement can create “third-party” rights en-abling non-parties to the contract to enforce those obligations: If the com pany fails tolimit its use or provide the community with adequate water supplies, community mem-bers may be able to take them to court and seek relief for the company's breach of thecontract.

But some contracts seek to foreclose that avenue. The Liberia - Putu (2010) agree ment,for example, states:

"33.6 Third Party Beneficia ry

Apart from the government, the Company and the shareholder… noPerson shall have any rights under this Agreement."

This provision does not neces sarily mean that individuals negatively impacted by themining operations are without protection. They may have other causes of ac tion theycan turn to based on tort, environmental, property, or other law. Nevertheless, thesetypes of claims are not always available in every jurisdiction, and may not cover or pro-vide ef fective remedies for breach of the mining contract. This clause in Article 33.6 istherefore significant in that it cuts off one potential avenue that individuals or com -munities may have otherwise been able to use in order to enforce contractual commit-ments made for their benefit or pro tection by governments and/or companies.

A final issue relating to harm to non-parties to the contract (e.g., an em ployee or nearbyfarmer) is that when one of these non-parties is harmed as a result of mining opera-tions, and sues the government and/or company for relief, the contract often specif ieswho will wind up ultimately paying for any compensation. These are called "indem-nification" clauses, and are used by contracting parties to decide how to allocate liability

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between themselves.

H O W T O H A N D L E E V O L V I N G E N V I R O N M E N T A L A N DS O C I A L L A W S A N D R E G U L A T I O N S

The environmental and social impact of a mine at one point in time will not necessarilybe the same 10, 15 or 20 years later. Laws change over time, and those chan ges canapply to pro jects to upgrade their performance on any number of issues.

Are mining com pan ies always required to track such changes and ensure their com -pliance with relevant amendments? The answer to that question can determine wheth-er a country will have a mine that operates in accordance with best practices, or onethat compl ies with out dated standards.

Some contract provisions ac tual ly might hinder im provements in social and environ-mental performance. These are known as "stabiliza tion clauses" - provisions stating thatthe government will not require companies to comply with new environmental, laboror other laws as they are amended from time to time. This can freeze the environmentaland social regulation of a mining project, hindering governments' abilities to take intoaccount new in formation, technologies and best practices.

Other stabilization clauses do not "freeze" the law, but require the government to coverthe company's costs related to compliance with any new requirements. This al lows thegovernment to upgrade its environmental and social regulation of mining projects, butcan discourage it from doing so in practice.

Certain stabilization clauses give the mining company the choice of whether to begover ned by new laws or regula tions. This is the case with a stabilization pro vision con-tained in the Liberia - Mittal (2005) contract for development of iron ore in the country.It states in Article XIX:

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"In particular, any modifications that could be made in the future to theLaw as in ef fect on the Effective Date shall not apply to the CON CES-SIONAIRE and its As sociates without their prior written consent, butthe CONCESSIONAIRE and its As sociates may at any time elect to begoverned by the legal and regulato ry pro visions resulting from changesmade at any time in the Law as in effect on the Effective Date. In theevent of any conflict bet ween this Agreement or the rights, obligationsand duties of a Party under this Agreement, and any other Law, includ-ing administrative rules and procedures and matters relating to pro -cedure, and applicable international law, then this Agreement shallgovern the rights, obligations and duties of the Parties."

Because stabilization clauses can limit the government's ability to prevent environ-mental and soci al harms, or to ensure effective remedies exist for those harms, theyhave attracted strong criticism from civil society, among others. Some ex perts arguethey are bad poli cy and may even violate domes tic law and/or international humanrights law. The trend in practice is to limit stabilization where it exists to identified fiscaland closely related provisions and to explicit ly exempt social and economic policiesfrom stabilization.

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F I N D I N G G U I D A N C E A N DA N S W E R S O U T S I D E O FT H E M I N I N G C O N T R A C T

In the previous chapter, we described the kinds of social and environmental provisionslikely to be found in contem porary mining contracts and noted a number of specific is-sues that may (or may not) be dealt with in a mining contract. We also noted that nocontemporary contract is likely to contain all applicable social and environmental re-quirements. As a result, anyone who wants a comprehensive picture of the social andenvironmental requirements applicable under a proposed mining contract for his hercountry must look at the contra ct together with the co untry's applicable law and regula -tions.

Most countries today have comprehensive environmental pro tection laws and regula-tions, togeth er with an environmental pro tection agency administering them. The lawmay have developed so much that the contract will do little more than refer to it.

Yet beyond the contra ct and domestic law, there is a com plementary framework of in-ternational law, ancilla ry contracts, poli cy and guidance that can help provide specificsregarding expected or required conduct, or help fill in gaps. This section pro vides anoverview of that framework, and covers community development ag reements, industryand other standards, and relevant international law princi ples and rules.

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C O M M U N I T Y D E V E L O P M E N T A G R E E M E N T S ( C D A S )

Major IMCs have begun to establish, as a matter of course, community liaison or re-lationship build ing functions at project locations. These operations are typically respon-sible for such matt ers as general community consul tation and engagement, oversightof social baseline and impact assessment work, development of social impact manage-ment plans, planning and implementing community investment strategies, the designof community capacity building projects, and dealing with individual and communityrequests for assistance, com plaints and grievan ces.

These developments have become more formalized as communities have begun to ex-press their needs in a more organized fashion, and mining com panies have realizedthat a wide range of support ac tivities cannot continue to be administered withoutsome kind of a plan to set priorities and make clear the limits of the com pany undertak-ings. This process appears to be most advanced in Australia and Canada, where be-nchmark ag reements were signed in the 1990s directly between IMCs and aboriginalgroups, and continue to be negotiated today. While certain provisions have requiredadjustment over time and in light of accumulated experience, they have generally with-stood the passage of time.

There is now serious discussion about expanding and formaliz ing company-communityunderstandings in other country environments that are unrelated to indigenous status.A number of count ries are encouraging or requiring companies to negotiate such agree-ments, currently known as community development ag reements (CDAs) in advance ofor as part of project development. Papua New Guinea, Mongolia and Nigeria each has aprovision in its mining law requiring the mining license or contract holders to negotiateand enter into CDAs to facilitate the transfer of social and economic benefits to localcommunities.

CDAs can help define the re lationship between mining com panies and impacted com-munities, in cluding the roles of local and national governments and nongovernment alorganiza tions. They are often an expression of a mining company’s commitment to cor-porate social respon sibility.

The creation of a CDA may also flow from corporate response to significant conflict withlocal communities. When BHP Billiton acquired the Tintaya Copper Mine in 1996 in

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Peru, it ran into widespread community dis content related to the land acquisi tion pro-cess and unfavor able treatment of the local community when the mine was under stateownership. The Tintaya Dialogue Table was created to provide a forum for address ingthese grievances and an agreement was finally reached with the five com munities in2004, covering issues of compensation and monitoring and establishing a com munitydevelopment fund.

W H A T I S I N A C D A ?

CDAs vary in coverage but primari ly focus on those issues most pertinent to impactedcommunit ies, including employment and economic development, land use, services,infrastructure and processes for bringing grievances. They may include com pany em -ployment commitments, specific local infrastructure commitments, or specific socialservices. A careful CDA will probably specify the tim ing of contributions, the use towhich each con tribution is to be put (or the pro cess for allocating funds to specific uses)and a vehicle for the management of the contributed funds.

They also provide a framework for community interactions with the mining company(and potentially local government entities) across the whole range of matters that mayconcern the local community. By bringing the players togeth er on a regular basis, theycan build relationships between the players and thus establish an atmosphere of mutu-al trust and respect. In many cases this pro cess may be as important as the details of theagreement itself.

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A comprehensive CDA would cover most of the matters set forth below. Actual agree-ments may differ from this in response to local circumstances and the dynamics ofnegotiation:

the objectives of the agreement,

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who represents the company,

who represents the community,

how the agreement is administered (meet ings, meeting procedures, etc.),

how community members participate in decision-making and CDA administration,

representation of interests of women and subcom munities,

undertakings with respect to the social and economic contributions of the projectto the com munity,

relevant timelines,

assis tance in creating self-sustaining, income-generating activities,

consul tation on mine closure measures,

participation in environmental monitoring programs,

funding requirements and qualifying ex penses, disbursement requirements, man-agement, ac countability, and transparency of funds,

mechanisms for monitoring the achievement of stated goals or milestones, and re-lated progress and achievement reporting requirements, and

grievance and dispute resolution mechanisms.

CDAs are not without risks. Requiring communities to enter such formal ag reementscan be co unterproductive. At the out set, there are identification issues (e.g., who is in-cluded in the commun ity? who is empowered to re present it?) highlighting the exist-ence of com peting interests within the community. Form al ag reements can also giverise to perceptions that a community has been misled or coerced, or that a “backroomdeal” has been struck with selected interests. They may also encourage dependence oncompany pro vision of services that ought to be provided by the local or national govern-ment. Careful com munity leaders will want to know the details of the min ing com -pany's community obligations (if any) under the national investment contra ct with thegovernment before negotiations begin. This will better enable them to ensure that the

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commitments reinforce each other, and that the CDA requires addition al steps beyondwhat the company had already committed to under the mining contract.

I N D U S T R Y A N D O T H E R S T A N D A R D S

In addi tion to referencing applicable laws, a contract may require the com pany to fol-low "good industry practice", "accepted industry prac tice", or "best prac tices". As contractlanguage quoted in the chapter above showed, some ag reements specifical ly refer to aparticular set of standards (e.g., the IFC Performance Standards), and/or a standard-setting body (e.g., the ICMM), in order to better clarify in advance what type of conductis required.

Absent a specific reference, such pro visions (or ex pec tations) seeking "good", "accepted",or "best" practices can lead to dis putes during the contract implementation phase. It isalso worth keeping in mind that differences of opinion are likely to become more acutewith the proliferation of new industry players operating around the world from count-ries like China, Russia and India, without experience in the international industry. Theirassumptions as to "standard practice" may be born from their experi ence operating intheir domes tic contexts.

There has, however, been a recent prolifera tion of volun ta ry and semi-voluntary stan-dards aris ing from intergovernmental, multi-stakeholder, and industry sources, whichcan help clarify what types of practices are standard, accepted, or even the "best". Thesenew standards have in troduced new ways of understanding and addressing environ-mental and soci al issues, of report ing company and government conduct and perfor-mance, and of handling and addressing community concerns and grievances. Whilemost are voluntary in itiatives, they are increasingly shaping what is considered respon-sible social and environ mental standard practice and serv ing as a basis for guiding andevaluating IMC and government performance in these areas.

Some of the more influential initiatives and organizations that have establis hed volun-tary standards are detailed here, but the list is far from com plete.

The International Council on Mining and Metals (ICMM) was set up in 2001 in Londonby a number of major players in the international mining and metals industry to sup-

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port sus tainable development in connection with mining projects. Member companiescommit to implement and measure their performance against 10 sustainable develop-ment principles co vering social, environ mental, economic and eth ical dimensions ofop eration. These are rein forced by clarifying position statements and guidance.

A number of national and pro ducer associa tions have developed their own codes ofconduct and sustainability frameworks, like the Mineral Council of Australia's EnduringValue, and the Min ing Association of Canada's Towards Sustainable Mining, which alsoaddress social, environ mental and health and safety issues. These main ly apply toAustralian- and Canadian-based operations, but the conduct of Australia's andCanada's more junior exploration and mining companies operating abroad have be-come national issues. Both co untries are looking at ways of promoting more respon-sible soci al and environ mental practice by their national companies operating abroad.

Outside of the mining sector, the International Organization for Standardization (ISO)has developed stan dards for managing environmental im pacts and im proving environ-mental performance (ISO 14000). Mining companies commonly seek such certificationand are subject to regular third-party audits of compliance at their mining sites. ISO hasalso developed guidance on social responsibil ity (ISO 26000), which at this point is setup as a voluntary under taking without any certification mechanism.

During the past decade a number of International Financial Institutions like the WorldBank, Inter-American Development Bank, Asian Development Bank, African Develop-ment Bank, the European Bank for Reconstruc tion and Development and the Inter-national Monetary Fund have strengthened their environmental and social safeguardpolicies. These policies normally apply only to projects supported by them, but aresometimes incorporated into other pro jects, and can more broadly serve as voluntarystandards and guidance where they aren't formally required.

The IFC Performance Standards were first formalized in 2006 and updated andapproved in 2012. These Performance Standards were developed for and apply to IFC-supported projects, and are also used within the broader World Bank Group for certainBank-supported projects. Many other institutions, including the roughly 80 financial in-stitutions that have signed onto the "Equator Principles", have also adopted the IFCstandards, meaning that the projects they fund are similarly expected to com ply withthe IFC requirements.

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The IFC Performance Standards cover social and environmental baseline and im pact as-sessments, environmental man agement plans, safeguards for indigenous peo ples andtheir cultural heritage, control of environmental contaminants and pollution, land ac-quisition and resettlement, and protections for the health, safety and security of com -munities. Many IMCs, especial ly the larger ones, have subscribed to specific individualstandards, most commonly Performance Standard 5 on Land Acquisition and Involun-tary Resettlement.

For issues of corporate responsibility more generally, the OECD Guidelines for Multi -national En terprises are also re levant. OECD countries are expected to encouragebusinesses based in their co untries to operate in accordance with these Guidelines.Each of the co untries maintains a "National Contact Point", which may receive and re-view any complaints brought against businesses based in the country but operatingover seas. The Guidelines are periodically updated to take into account new or emerg ingthinking and expectations.

The Extractive Industries Transparency Initiative (EITI) is an international initiativefounded on the notion that increased transparency of the revenues flowing from min-ing and petroleum companies to host governments is a key channel for ensuring im-proved governance in the sectors. In addition to the publication of detailed reports co-vering payments and revenues, among other aspects of the extractive sector in a givencountry, the EITI process requires the establishment of a multi-stakeholder group con-sisting of government, company and civil society representatives, which is intended toserve as a platform for dialogue around all as pects of the extra ctive industries in a co-unt ry. At the time of publication of the first edition of this book, 41 countries were de-emed either "compliant" or "candidates" under the EITI standard.

In 2000, a number of governments (the UK, US, the Netherlands, and Norway), com-panies in the extractive industries, and non-governmental organizations issued a set ofVoluntary Prin ciples on Security and Human Rights (sometimes referred to as the"VPs"). The VPs aim to guide oil, gas, and mining com panies on providing security fortheir operations in a manner that respects human rights.

More recently, in 2007, the United Nations General As sembly endorsed the UN De-claration on the Rights of Indigenous Peoples, which was over 25 years in the making. Itwas endorsed by 143 countries with 45 absent or abstaining and 4 objecting. A number

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of the hold-out countries have since endorsed the Declaration. Of particular interest tolocal communities and mining companies is Article 32(2), which states that:

“States shall consult and cooperate in good faith with the indigenouspeoples con cerned through their own representative institu tions inorder to obtain their free and in formed consent prior to the approv al ofany project affecting their lands or territories and other resources, par-ticularly in connection with the development, utilization or exploita-tion of mineral, water or other resources.”

I S T H E R E A L I N K T O I N T E R N A T I O N A L L A W ?

In addition to the in tergovernmental, industry and other standards outlined above,there is also a body of international law that is relevant for mining contracts.

International law governs the activities of states – and not the activities or conduct ofprivate actors such as companies. But im portantly, obligations on states under inter-national law also affect what they can promise to companies in investment contracts oragreements, and what duties they owe to their populations even when a contract issilent or contravenes these duties.

To list all re levant international law sources is impractical, but ex am ples can be givenfor specific issues. As noted in sample in stances below, this body of international lawmay provide opportunities to bring suit against contracting parties for grievances re-lated to environ mental and social impacts of mining operations.

Human rights law – which is made up of a number of international and regional treat-ies and rules – is especially important. States have the legal obligation to respect, pro-tect and fulfill the human rights set out in the internation al human rights treaties theyratify. This in cludes a duty to protect those rights against infringement by third partiessuch as corporations. Major international human rights instruments are the 1948 Uni -vers al De claration of Human Rights, the 1966 International Co venant on Civil and Polit-ical Rights (167 state parties) and the 1966 International Covenant on Economic, Socialand Cultural Rights (161 state parties). Copies of these documents are readi ly accessibleonline by Googling their respective titles.

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Regarding human rights for workers, the International Labor Organization’s (ILO) De-claration on Fundamental Principles and Rights at Work commits all its member statesto four categories of principles and rights: freedom of association and the right to col -lective bar gain ing; the elimina tion of compulso ry labor; the abolition of child labor; andthe elimination of discrimination in respect of employ ment and occupation. There areeight treaties that states worldwide have negotiated and ratified regarding pro tectionof these core rights. There is also ILO Convention 169, dealing with Indigenous and Trib-al Peo ples, which recognizes the right of indigenous peoples to participate throughtheir traditional organizations in all government decisions affecting them.

A number of regional human rights treaties also exist that govern state conduct whencontracting with private investors. These include the 1981 African Charter on Humanand Peoples Rights; the 2003 Pro tocol to the African Charter on Human and Peoples’Rights on the Rights of Women in Africa; the 1969 American Convention on HumanRights; the 1988 Addition al Protocol to the American Convention on Human Rights inthe Area of Economic, Social and Cultural Rights; the 1950 European Convention onHuman Rights; and the 1961 European Social Charter.

Importantly, internation al human rights law has some teeth, as certain treaties provideindividuals, com munities and other entities judicial or quasi-judicial mechanisms tobring claims against states before courts, tribunals and other bodies. In the 2001 AwasTingni case, for exam ple, an indigenous community successfully sued the Nicaraguangovernment for failing to ensure an effective consultation process before granting alogging concession on its land. The Inter-American Court of Human Rights determinedthat Nicaragua violated the American Convention on Human Rights by failing to pro-tect the community’s customary tenure and col lective land and resource rights.

Since that decision, much work has been done by various organiza tions to further de-scribe what international human rights law requires of governments when contra ctingwith private com panies for mining and other pro jects. Among those efforts, in 2011, theUnited Nations Human Rights Co uncil adopted a report containing principles on re-sponsible contracting that aim to assist government and private negotiators seeking toensure their deals are con sis tent with human rights.

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E C O N O M I C L I N K A G E S

I N T R O D U C T I O N

M I N I N G A N D L O C A L C O N T E N T

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I N T R O D U C T I O N

With the wave of liberalization of the 1990s and the so-called "Was hington Consensus,"many mining ag reements lost the development orientation they had in the 1970s and1980s. For host governments, what was previous ly called a "mining develop ment agree-ment" became an investment promo tion agreement, bringing limited tax revenues tothe government, and not much else. Those agreements allowed the development of an"enclave" model of mining, whereby mines operate and pay taxes, but remain largelydisconnected from the rest of the economy.

Twenty years later, there is increasing awareness among host countries that the mineswhich could have been a springboard for development have failed to produce in-country be nefits. The aim now, therefore, is to integrate the mines into the heart of, andleverage them for, economic growth. Reflecting this trend, the Heads of Af rican Stateshave drafted the African Mining Vision, which recognizes the role that minerals canplay in spurring real economic growth and driving economic di versification. Ratherthan using mineral wealth solely as a way of generating revenue, this strategy seeks tobetter embed mining opera tions into the economy of the country.

The chal lenge is how to put this into practice.

This sec tion describes different options that a host government can negotiate with amining company to help ensure that the mining project generates linkages with and in-tegration into the economy. The first chapter deals with what is commonly cal led "localcontent" and the second discus ses infrastructure li nkages.

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M I N I N G A N D L O C A L C O N -T E N T

Local content requirements in contra cts are inten ded to en sure that host countries'citizens get jobs and training, and local firms get supply contracts. Mechanisms such asobjectives for local employ ment or suppliers, preference schemes for local businesses,industry or human capital development support from the government, or giv ing localbusinesses greater access to finance, are all methods of achieving local con tent goals.

A variety of definitions are used to determine what is "local". Depending on the context,for example, a company may be deemed "local" based on its registration, ownership,workforce, or value-added in terms of local production. A majority foreign-owned com -pany can even qualify as “local” in some cases, as long as a local firm has a minimumpercentage stake.

M I N I N G A N D L O C A L C O N T E N T

Many min ing contracts have local content pro visions aim ing to maximize the economicop portunit ies from mining investment and better en sure that benefits remain in the co-untry. The aim of these provis ions is to harness mining activ ity for sustainable growthand development. These add to what might also be found outside the contract in co-untries' laws, practices and policies, as well as in commun ity development ag reements(CDAs). (For more on CDAs, see the section, "Environmental and Social Issues").

When used properly, these policies and instruments boost skills and economic oppor-

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tunities. They can also serve the mining company well, as local ly sourced workers andproduction can be less expensive, more predictable, and help embed the com pany inthe host country, strengthening connections between the firm and a broad range ofstakehold ers.

Achieving the objectives that local content provisions aim at, however, can be dif ficultas it involves coordinating policy and contractu al instruments in light of national, re-gional, local, and cross-border considerations. Too often, local content suff ers two re-lated ills – poorly crafted local content pro visions, and weak enforcement.

W H A T R O L E D O E S T H E C O N T R A C T P L A Y ?

Sett ing Out the RequirementsAs noted above, mining contra cts increasingly include local content requirements co-vering such issues as em ployment, supply chain procurement, training, skills buildingand knowledge transf er.

The Guinea - Simfer (2002) contract is a fairly typ ical exam ple, demanding that thefirm:

source Guinean products and services to the extent possible,

prioritize hiring of Guinean nation als for manual labor as well as for skilled labor(subject to ex perience and qualifications), and

create a train ing program for Guinean personnel.

The Liberia - Mano River (2005) contract (Article 10.1) is more blunt, simply stating, “TheOperator shall not employ foreign unskilled labor. To the maximum extent feasible, theOperator shall em ploy Liberian citizens at all levels.”

The Australia - McArthur River Project (2007) agreement provides another ex am ple. Itrequires the company to use local labor and services with in Northern Territory ofAustralia, but states that the company can look elsewhere for labor and services pro vid-ers if it can demonstrate that complying with those requirements "is im practical for

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commercial, technical or other reasons." (Article 13(1)).

Developing and Strengthening Upstream and Downstream Diversifica -tionLocal content pro visions are often used to de velop and strengthen "upstream" linkages -connections integrating local individuals and entit ies into the mining company's supplychain. But provisions can also be used to generate "downstream" linkages that en-courage increased value-added activities. While it is rare for the contract to include re-ferences to downstream requirements, some contract terms do highlight such diver-sifica tion strateg ies.

The Australia - McArthur River Project (2007) contract, for exam ple, states in its articleon "Downstream Processing" (Article 12):

"(1) Hav ing regard to the Ter ritory's intention to have es tablisheddownstream processing within the Northern Territo ry, the Com panyshall in accordance with this clause, unless otherwise ag reed in writingby the Minister, investigate downstream processing of zinc, lead andsilver with in the Northern Territory.

(2) The Company shall within 7 years of the date of this Ag reement andevery 5 years thereafter pro vide to the Minister, unless otherwise ag-reed in writing, a written report sett ing out the technical and economicfeasibility of downstream pro cessing of zinc, lead and silv er.

(3) The Company shall use its best endeavours to encourage and sup-port downstream processing of zinc, lead and silv er within theNorthern Territory if it is technically feasible and com mercial lysound..."

Similarly, the Mongolia - Oyu Tolgoi (2009) agreement states:

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"3.19 Within 3 (three) years after the Commencement of Production,the Investor will, if reques ted in writing by the Government, pre pare aresearch report on the economic viability of constructing and operatinga copper smelter in Mongolia to process mineral concentrate Productsderived from Core Opera tions into metal (the Smelter)...

3.20. If the Government either alone or in conjunction with others or athird party plans for the construc tion of a Smelt er in Mongolia, the In-vestor will, if requested in writing by the Government, provide on ag -reed terms, with preferential access, Rio Tinto's (or its Affiliates) Pro -prietary Technologies held in joint venture with Outokum pu, for theoperation of the Smelter.

3.23. If the In vestor constructs a Smelter in connection with implemen-tation of the OT Project that Smelter will be located in Mongolia."

Both of these provisions aim to encourage development of downstream activities but, itis important to note, also recognize that it might not be economically viable.

This highlights the point that policies for encouraging local content must be carefullydesigned. Insisting on downstream processing, for instance, can be an il lusive require-ment for many reasons. Downstream processing can be a very capital-intensive and alow-margin business. If the country doesn't present the right comparative advantage(e.g., it doesn't have inexpensive energy, proximity to the market for the finished pro-duct, skilled labor, or stable currency), it might not be sufficiently competitive fordownstream investment. The country is often better off spending its negotiating capitaland resources creating an industrial strategy that will facilitate the development of"upstream" (supply chain) linkages for the mine.

Flexible or Fixed Re quirements?Local content clauses tend to fall into two camps: those that require specific minimumtargets or those that set more flexible objectives.

The Afghanistan - Qara Zaghan (2011) contract is an example of a more flexible

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approach, stating that the inves tor, Afghan Krystal Natural Resources Com pany, “shallemploy Afghan person nel, to the extent practic able in all classifications of em ploy-ment, for its Gold Production Facilities construction and operations in Afghanistan.”(Article 14.1).

In contrast, Article 11.1 (a) of the Liberia - China Union (2009) contract pro vides morefixed targets, stating:

"[...] parties shall agree on progres sive implementation of an em ploy-ment schedule so as to cause citizens of Liberia to hold at least 30% ofall man agement positions, including 30% of its ten most senior posi-tions, within five years of the Effective Date, and at least 70% of allmanagement positions, including 70% of its ten most senior posi tions,within ten years of such date."

Similarly, the Mongolia - Oyu Tolgoi (2009) agreement lays out fixed targets for em-ployees hired by the mining company, making clear that, "[i]n accordance with Article43.1 of the Minerals Law, not less than 90% (ninety percent) of the Investor’s employeeswill be citizens of Mongolia.” With respect to subcontracting, however, the contract ismore flexible, stating that the company is to use its "best efforts" when subcontractingin order to ensure that at least 60% of construction em ployees and 75% of mining-related em ployees are Mongolian citizens. (Articles 8.4 and 8.5).

Enforcing the RequirementsIt is one thing to have local content requirements in the contract. It is another to enforcethem. There are three factors that can make enforcement particularly difficult: one isvague contract language; a second is the challenge of monitoring compliance; and athird is related to the consequences of breach.

The issue of vague contract language can be seen in the Guinea - Simfer (2011) , Liberia -Mano River - Exploration (2005), and Australia - McArthur River Project (2007) agree-ments quoted above. Companies may want more flexible stan dards as they can be easi -er to incorporate with in their business opera tions and strategies. But with flexibil itycome ques tions of interpretation. When companies are required to comply with localcontent rules only "to the extent possible" to the "extent feasible", or "if practical", who

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determines what is possible, feasib le, or practical, and how is that done? When contra-cts specify that domestic citizens are to make up a certain number of positions of seniorpositions, who determines what is a "senior" position? And when com panies are to usetheir "best ef forts," what exactly does that mean?

These types of questions commonly arise, and can make it difficult for governments toenforce local content obligations.

The second enforcement chal lenge is monitoring. After negotiating for local contentcommitments, how can governments make sure that they are followed? Some contra-cts help address this issue.

The Australia - McArthur River Project (2007) contract, for example, states that theMinister for Energy and Mines may an nually request, and the com pany must then pro-vide, "a written report concerning [its] compliance with and implementation of the"contract's local content requirements. (Article 13.2).

But then there is the question of consequences. Suppose the Australian governmenthas a re port from the company that shows noncompliance. If there is no penalty forbreach, why would the company comply?

Some contracts include fines. The Mongolia - Oyu Tolgoi (2009) contract requires thecompany to pay a penalty if it hires too many foreign employees (Article 8.7):

"If the Inves tor employs more foreign nationals than the specified per-centage set forth in Clause 8.4, the Inves tor shall pay a monthly fee of10 (ten) times the minimum monthly salary for each foreign national inexcess of the specified per cen tage."

But contracts may also effectively minimize the sanctions associated with non-compliance. That same Mongolian agreement illustrates this when it says a breach oflocal hiring requirements will not constitute a breach of the overall agreement and maynot be used by the government as a ground for ter minating the contract. (Article 8.9).

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L O O K I N G B E Y O N D T H E C O N T R A C T

It can be a mistake to consider the contract as the sole source of obligations. Legislation,policies, requirements built into community agreements, and com prehensive industrypolicies and initiatives, are all tools that can also sup port local content.

Legal and Regulato ry FrameworkA contract, rather than creating project-specific local content requirements, could in-stead require the investor to follow the applicable law and regulations. The number ofgovernments that have broad local content legis lation, however, is limited.

Indonesia, South Africa and Zimbabwe are amongst those countries that have mining-related national legislation.

Indonesia’s 2009 mining law states that companies must give priority to local em-ployees and domestic goods and services in accordance with the applicable laws and re-gulations. It also has a pro vision relating to a divestment obligation for foreignshareholdings to local companies. Accord ing to that law, after five years of pro duction:

"Companies must divest part of [their] s foreign shareholding (if any) tothe Government, Regional Government, State Owned Busi ness Entity(Badan Usaha Milik Negara or BUMN), Regional Owned Business Entity(Badan Usaha Milik Daerah or BUMD) or (iii) Private Owned Busi nessEntity (Badan Usaha Milik Swasta or BUMS)."

In 2013, the government is sued regulations clarifying what com panies need to do inorder to comply with that law.

The 2009 law also includes pro visions to encourage local development "downstream",obliging companies “to pro cess and refine mining products in Indonesia," and statingthat "the extent of the required local process ing and refining are to be specified in theimplementing regulations.” (Ar ticles 95-112 and 128-133).

More countries, in cluding South Africa, the Philippines and Australia, have tightenedtheir project-approval and regulatory processes in order to promote linkages. Miningcompanies can be required to produce local content plans that include enterprise and

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workforce participation in the min ing area and that are integrated into regionaleconomic development plans in order to move forward with their operations.

Some of these efforts are a product of unique country dynamics. For example the Soci aland Labor Plan referred to in South Africa’s Mineral and Petroleum Resources Develop-ment Regulation (2002, Ch. 2, Part 2) reflects the broader push in that co untry for blackeconomic empowerment. A social and labor plan, which is a requirement for mineral orproduction rights, must include employment statistics and the mine’s strategy for en-suring within a specified time frame that 10 percent of the employees are women and40 percent of man agement are historically disadvantaged South Africans (HDSAs). Theplan must also set out a local economic development program that aims to increaseprocurement from HDSA companies.

Local Development Ag reementsIn addition to en tering into agreements with the national government, mining com-panies may also negotiate agreements directly with local com munities. These can beeither community develop ment ag reements (also referred to in the section on Environ-mental and Social Issues) or local agree ments as in Canada and Australia.

Agreements negotiated with the Indigenous Peoples of Canada provide particularlygood exam ples. One is the Benefits-Impact Agreement between Diavik Di amond MinesInc., Rio Tinto and five neighboring aboriginal groups in Northwest Territories. The ag -reement requires that contracts between the mining company and local groups withinthe operation area remain in force for the life of the mine. In legal terms, they are “ever-greened,” which means that, subject to satisfacto ry performance, the aboriginal contra-ctor will have the work as long as the mine is in production.

The Raglan agreement between the Inuit in Canada and the mining com pany is anotherex ample. It sets forth those goods and services which must be the subject of "directcontract negotiations sole ly with an Inuit Enterprise". The contract identif ies such workand services as air transport, catering and hotels, road maintenance, diamond drilling,ground transporta tion of supplies, trucking of concentrate, fuel transportation, handl-ing, distribution, environ mental research monitoring, and baseline studies and on-sitepreparation of explosives.

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Com pany Policy, Industry Initiatives, and other Collaborative EffortsEven where there are no legal requirements to prioritize the recruitment of local work-ers or the use of local busines ses, many firms have im plemented their own local con-tent policies.

Companies are interested in strengthening the skills base of the countries where theyinvest. The World Business Council for Sustainable Development (WBCSD) NationalMarket Participation Initiative engages local investors and governments in a di alogueto identify shared interests, and to increase the competitiveness of local com paniesrather than focus on obliga tions.

Improving skills and en trepreneurial capacity is also an increasing prior ity for develop-ment agencies and intergovernmental organizations. Joint initiatives are emerging,such as the African Mineral Skills Initiative, a private-public partnership including theUnited Nations Economic Commission for Africa (UNECA), AngloGold Ashanti andAusAID. This initiative seeks to create and support new solutions to fill identified miner-als skills gaps.

Indeed, in implementing local content, the most successful countries may be thosewhich create a collaborative environment with investors. Just laying down the law maynot align with the in terests of either business of the local capabilities. In contrast,through collaborative approac hes, governments and com panies sit togeth er to es-tablish a realistic timeline for employment, pro curement and training.

This happened in Chile. An NGO there convinced the 12 largest mining companies to or -ganize a training program to train future miners. The government then complementedthe investment with $30 mill ion in public funds. Copper companies in Chile have sincedesigned a supplier development pro gram which has generated a network of inter-nationally competitive small and medium enterprise sup pliers for the mining sector.

A V I O L A T I O N O F I N T E R N A T I O N A L L A W ?

One caveat here is that local content provisions also need to be reconciled with inter-national trade and investment law.

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Mem bers of the World Trade Organization (WTO) are bound by the Agreement onTrade Related In vestment Measures (TRIMs Agreement) that limits certain "perfor-mance re quirements" relating to trade in goods, such as:

Requirements to use or purchase local goods;

Trade-balancing requirements;

Foreign ex chan ge restrictions related to the foreign-exchange inflows attributableto an enterprise; and

Export controls.

Yet the TRIMs Agreement left many types of performance requirements untouched.These include:

measures re lating to trade in services, not goods;

re quirements to establish a joint venture with domestic participation;

re quirements for a minimum level of domestic equity participation by domes tic in-dividuals or entities;

re quirements to locate headquarters in a specific re gion;

local employment requirements;

export requirements;

technology transf er requirements; and

re search and development requirements.

Some "investment treaties", however, go farther than the TRIMs Agreement and pro-hibit some of these types of measures, including requirements to form joint ventures,procure local services, invest in research and development, and transf er technology.

While the language may vary from treaty to treaty, an increasingly common pat ternamong the investment treaties is to ban certain performance requirements outright,

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while al lowing governments to impose others as long as they pro vide some type of ad-vantage or benefit in exchange.

Governments seeking to maintain their abilities to use those performance require-ments not already barred under the TRIMs Agreement or under the investment treatiesthey have signed have various options. These include not entering into investmenttreaties; excluding from new investment treaties any provisions that restrict perfor-mance requirements; in cluding ex ceptions in their treaties designed to allow or ex cludeonly certain types of performance requirements (e.g., maintaining the ability to im posejoin venture requirements but including re strictions on procurement of local goods);and including exceptions designed to allow or exclude performance requirements onlyin specific sectors (e.g., carving out mining from the covered sectors).

Restrictions on performance requirements can be found in investment treat ies con-cluded by the Uni ted States, Canada, Japan, Col ombia, and other countries.

(Investment treaties are also discussed in the chapter, "Dispute Avoidance and Resolu-tion").

U N I N T E N D E D A N D U N W A N T E D C O N S E Q U E N C E S

Local content provisions are typically well intended, but can produce unwanted out-comes. These in clude:

inflation of the price of the goods and services suddenly procured local ly and be-nefit ing from the mining demand;

disputes and tensions aris ing from perceptions that certain interests are beingfavored;

enhanced corruption risks associated, for ex ample, with hav ing local content decis-ions aligned with inves tor or government interests, or local contractors falsify ingcapabilities so as to be able to meet qualifica tion targets to bid, or even bribing of-ficials to gain certification; and

creation of depen dency on mining demand that can become problematic when the

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mine closes.

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M I N I N G A N D I N -F R A S T R U C T U R E

Mine development requires good infrastructure. Heavy equipment, sup plies and peo-ple need to be brought in. Power and water are needed. Ore needs to be trans ported forprocessing and/or export. Development of such infrastructure is capital intensive. Itforms an ever more significant outlay for mining companies. Mining-related infrastruc-ture cost as a share of mining development cost has gone from 40% to 80% in the last12 years.

Mining concessionaires have his torically resorted to an “enclave approach” to in frastruc-ture development, providing their own power, water, information and communica tiontechnolog ies (ICT), and trans por tation services to ensure reliable infrastructure for theirop erations. Contracts typically assured mining companies of rights of access and toconstruct necessary infrastructure.

Given mining company control of those developments, large invest ments in physical in-frastructure are often uncoordinated with any national in frastructure developmentplans. A country can therefore miss the opportunity to use mining infrastructure to sup-port more broad-based economic development.

Potentially, port, road and rail investments for mining can catalyze supporting and an-cillary economic activity. Hence the concept of "resource corridors" developing al -ongside mining-related infrastruc ture. As outlined below, some contracts betweengovernments and in vestors now include options and requirements that support poten-tial third-party uses of such infrastructure.

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A C A S E F O R S H A R E D I N F R A S T R U C T U R E

If done well, min ing investment can contribute to development of shared infrastructurewith both mineral and non-mineral users that will be benefici al for sustainableeconomic growth.

"Shared use" can entail two dif ferent options. First is multi-user, meaning several min-ing companies in a region develop/use common infrastructure. Second is multi-

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purpose, where non-mining users share the infrastructure with the mining company(for ex ample a forestry concess ion access ing the mining-related power infrastructure,or passengers being transported along a mining company railroad).

Both can offer benefits. The former may lead to economies of scale among the miners,thereby increasing tax revenues to the government. The latter may lead to eas ier andmore cost-efficient access to water, energy, transportation, and telecom municationsservices – all building blocks for economic development in a re gion.

Opening up mining-related rails and ports can mean im proved and often cheaper ac-cess to markets, both local and international. The development of hy dropower, wherefeasible, can be a cost-effective source of energy to support the heavy energy demandfor mining operations while ensuring that excess power can be made available via im-proved and affordable access to electricity for communities and nations. Water treat-ment facilities developed to serve the water needs of the mine can be designed withsurplus capacity to serve surrounding com munities with no previous reliable access topotable water. Governments and the private sector can also capitalize on civil works forroad and rail ways to in stall fiber optic cabl ing to offer telecommunication services.

Of course, these considerations are more relevant in the context of developing countrieswhere basic in frastructure is often either missing, of limited capacity, or in poor condi-tion.

O W N E R S H I P A N D A C C E S S

The opportunities for "shared use" of the mining-related infrastructure will depend onthe ownership model of this infrastructure. If mines inherit existing infrastructure onthe concession, or are authorized to build and own relevant infrastructure, they willgeneral ly pre fer not to share it. This is especially true for infrastructure, such as rail andports, that are strategic to the mining operation and for which im plementing shareduse can constrain capacity or bring a high cost of coordination.

Investors tend to be more flexible in considering shared use of non- or less-strategic in-frastructure (power, water, roads, and ICT). In fact the business case for shared use canbe more straightforward due to obvious economies of scale and scope or a need to rein -

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force their social licen se to operate. Just imagine being a mine with access to electricityand potable water surrounded by a com munity living in the dark and drinking pollutedwater. This situation will not be sustainable and will li kely result in social unrest sooneror later.

In the alternative ownership model, where the infrastructure is owned by a third partyor a state-owned company, the government will likely find it easier to limit exclusive ac-cess for the min ing company. However, allow ing other uses invol ves trade-offs as well.Typically, mining investors will leverage their expertise and access to capital to build keyinfrastructure faster and more cheaply than if developed by others. So limiting theircontrol of infrastructure development can delay a project or un dermine its potential ef -ficiency. Plus, accommodat ing government demands for open access to infrastructurewill often come at the expense of negotiations around fiscal terms. Foregone revenuesneed to be justified as a price worth paying.

T H E N E E D F O R I N T E G R A T E D P L A N N I N G

Ideally, decisions on in frastructure usage, including negotiated com mitments incontracts, should be made in the context of a comprehensive planning framework thatconsiders a range of key factors. Each mining project presents different opportunities tobuild infrastruc ture li nkages to communities, the region and the co untry, depending onthe size of the project, the type of com modity, present and future mining de mand forinfrastructure, present and future non-mining demand for infrastructure, and the pre-sent and future regulatory capacity available to en sure open access of the mining-related infrastruc ture.

Some examples: bulk commodities such as iron-ore and coal will require developmentof railways, whereas gold extraction only needs roads or sometimes just helicopters.Converse ly, gold extrac tion will require large access to water sources, whereas iron-oreand coal mines could rely on recycled water. In terms of energy demand, in addition tothe commodity type, what will make a difference is the degree of pro cessing: a crus hedcoal operation will require 500 times less power than a smelted aluminum opera tion(measured by kwh/ tonnes of pro duct).

Only when this pic ture is clearly defined can countries negotiate the best contractu al in-

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frastructure provisions with com panies. What if third party access on rails is required,but there is not sufficient pro jected demand for rail access? Similarly, what if the con-struction of a mini-grid for the community is negotiated, but the community has nowillingness to pay, and no competent institution is in place to ensure operations andmaintenance?

Once the government is con vinced that shared use will be beneficial to the country, andis ready to incur the related planning and regulatory costs, contractual terms need to benegotiated with close care.

C O V E R A G E I N T H E C O N T R A C T

Mining contracts typically specify rights to access and construct related infrastructure.

Where there is reference to third party access, it typically comes with many caveats, forexample that access only be provided when "the company confirms that excess capac ityexists and third party use of such ex cess capacity does not in terfere with operations".This leaves room for in terpretation, opportunism and asymmet ry of informa tion - mak-ing it relatively easy for an operator to justify denying such access.

It is still rare for a contract to make strong demands of investors in terms of third partyusage (cur rent or future). Mis sed opportunities for governments, may therefore in-clude:

- allowing mining companies to develop power plants without requiring the generationof extra electricity to be sold back to the grid. This is a missed opportunity for the count-ry, given that for companies the marginal cost of extra electric ity is very low.

- failing to retain government ownership of the right of way of any longitudinal in-frastructure such as power lines, slurry pipelines, rails, or roads. This is a missed oppor-tunity for the government to "monetize" the right of way for multi-purpose use.

- fail ing to include a Build Operating and Trans fer model or option that enables the in-frastructure to revert back to the government after a set period, by which time other in-dustrial and non-industrial demands may have increased and when there may be a vi-able option to bid out to third-party infrastructure concessionaires.

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Few countries have managed so far to avoid such pitfalls, but the Liberia - Putu (2010)contract has in teresting clauses that could serve as models in similar situations. Theyare unusual in the level of detail they provide and scope of the package of clauses cover-ing access to electric ity, to water, to build utilities and facilities integrated with com -pany infrastructure (such as to build telephone lines within the concession area), and tothe port and railroad.

For example, the contract requires the power plant for the mine to "be designed togenerate a quantity of electric energy in excess of the electric energy required by theCompany for Operations to supply third party users loc ated within a 10 km radiusthereof on a 7 days per week, 24 hours per days basis in accordance with third party userdemand from time to time" and "be designed and constructed so that it can be ex pan-ded on a commer cially feasible basis to have twice the electricity generating capacitynecessary to service Opera tions." (Article 19.3)

The contract additionally pro vides the company access to water on condition that it"does not affect the water supplies used by the surrounding population or, to the extentit does so affect water suppl ies, the Company provides an alternative source of watersupp ly to the af fected population." (Article 19.5)

The contract also states that port and rail infrastructure must be developed in line withthe agreed Development Plan. In the case of rail this means:

"The Railroad shall be designed so that it can be ex panded on a com -mercially feasible basis to carry on a continuing basis twice as muchtraffic as is contemplated by the preceding sentence but the Companyshall not be under any obliga tion to build such additional capacity ex-cept as it may elect pursuant to Section 6.7(k). Subject to Section 6.7(k),the Government or any third-party may elect to have the capacity of theRailroad expan ded to service the requirements of the Government orsuch third-party, the costs of such ex pansion to be borne by theGovern ment or such third party, as applicable." (Article 6.7.a)

In terms of the port, the contract states:

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"The Development Plan also shall pro vide for the construction by theCompany of the Port, with the capacity to allow for limited generalpetroleum-handling and general cargo and container berthing spacing,as well as specialized bulk facilities required by the Com pany’s busi-ness. The Port shall be designed and constructed such that it can be ex-panded on a commercially feasible basis to han dle twice as muchcapacity as is contemplated by the preceding sentence. Such expansioncapacity shall include the pos sible construction of an additional 50meters on the Iron Ore jetty and the driv ing of iron ore jetty piles atleast 5 meters deeper. The Port basin shall be desig ned to facilitatefurther large scale development consistent with any ex pansion of therailroad (e.g., lengthening of primary wharf, room for addition of ad-ditional wharf, or adequate pro tected anchorage)." (Article 6.7.d)

R E S O U R C E - F O R - I N F R A S T R U C T U R E S W A P S

The issues discussed above have focused on balancing demands for access to infrastruc-ture with in the broader negotiated pac kage of fiscal demands. However, there is an al -ternative model out there, where governments give access to natural resources in re-turn for construction of key infrastructure (non-mining related). Such "resource-for-infrastructure" deals have gained a lot of attention recently. A number of such contractshave been concluded in different parts of the world, though far fewer have reached im -plementation stage.

Resource-for-infrastructure swaps are most commonly associated with deals done byChinese companies operating in Africa. China’s demand for resources has been growingfast – it is the world’s largest consum er of key minerals, including iron ore, lead andzinc. Africa, in turn, has both a large endowment of under-exploited mineral resourcesand very immediate infrastructure needs. In such case, both sides could benefit. Chinagains access to much needed resources to sustain its economy, while Af rican nationsget much needed major infrastructure in a comparatively short period of time.

Yet these deals also give rise to notable risks. Above all, it is dif ficult to adequately de-termine the value of the ex change. Estimates for both the infrastructure and the miner-als can vary significantly. In one instance in Liberia, resource es timates have gone up 10-

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fold in 5 years from the start of negotiations. Even more challeng ing is determining theeconomic value of the proposed infrastructure, especially be cause it is not subject toany open competitive process. The bottom line is that it is even harder to assess fairnessof a resource-for-infrastructure deal than for a conventional resource-for-revenue ag-reement.

In addi tion, the contractual arrangements for resource-for-infrastructure swaps arehighly complex – involv ing mining as well as construction com panies. Where there iscomplexity, there is room for confusion and potentially more avenues for corruption.There is no clear contractual model as yet to guide parties.

Local content requirements are typically not attached to these deals – in fact the invest-ing company’s guarantee to pro vide the infrastructure is often dependent on its as-sumption of bring ing in foreign expertise, equipment, services and even labor. In suchinstances, the country may not have achieved optim al value for its resources.

L E G A L A N D N E G O T I A T I O NC O N S I D E R A T I O N S

S O Y O U T H I N K Y O U N E E D H E L P A F T E R A L L ?

1 7 0 Y E A R S A T T H E T A B L E : C O N F E S S I O N S O F AN E G O T I A T O R

D I S P U T E A V O I D A N C E A N D R E S O L U T I O N

P L A N N I N G F O R T R O U B L E

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S O Y O U T H I N K Y O U N E E DH E L P A F T E R A L L ?

Both parties to a poten ti al pro ject - govern ments and com panies - will need a range oftechnical expertise. When you are negotiat ing over as sets which could transform thefuture of your company - or co untry - you want to have as much information as pos-sible. You want to know the best es timate for the size and quality of the asset, the li kelycosts invol ved, what various fisc al structures predict about the size and timing of re-venue flows. All parties can benefit from guidance on the dozens of issues raised in thisbook: dealing with market volatility, local buy-in, environmental im pact management,hiring local firms, and more.

A large IMC will have its own geologists, number crunchers, managers and market an-alysts. It will li kely have a mix of in-house and external lawyers, with a range of legal ex-pertise and experience from all over the world.

A government, on the other hand, (and es pecially a less developed government)typically has less of everything. It has less in-house support and its budget will be li-mited. Moreover, it is bound by civil service codes and public service ethos, whichmeans it has a hard time paying high fees for international help even if the money isthere.

The choice of what external assistance you mobilize can make or break the deal.

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D O I N G D U E D I L I G E N C E

The first area in which external support may be useful is in doing due diligence on yournegotiating partner(s).

The term "due diligence" general ly refers to an investigation carried out by a party tolearn and verify the full background, history and current situation of the other party(ies)with which it may contract. Due diligence takes time and is expensive, but thoroughdue diligence will prevent and/or mitigate unwelcome surprises down the road. It is anessential tool in the decision making process of any investor, financi al institution orgovernment.

Potential mineral investors will do due diligence on governments, to as certain thestability of the government, and its political institutions to de termine the political andeconomic risk of doing business in the country. Investors will also look at the stabil ityand independence of the judici al system, the economic (debt) situation, the electoralsituation, the human rights situation, and any other is sues that could affect the pro-fitability of an investment and the reputa tion of the inves tor.

Govern ments should do similar due diligence of potential investors to as certain financi-al stabil ity, expertise, experience, track record on environment al and human rightspractices, history of disputes and the like. Not all investors are equal. One would expecta government to do much less due diligence on a well-known international com panywith public finan cial statements and a long track record than it would on a lit tle known,privately held com pany.

Some due diligence of poten ti al mineral inves tors can be done by governments in-house, but there are many specialized firms that will help governments verify the"health" and "character" of a potenti al mineral investor. Com prehensive due diligencecan involve entire investigative teams comprising lawyers, accountants, fiscal and taxex perts, human rights specialists, human relations experts, environmental specialists,ex perts in corporate social responsibility and more. Their job is to verify compliancewith applicable laws, policies, treaties and regulations, as well to find any "red flag"items that could cause problems, immediately or later during the dif ferent stages of themining project.

More specifically, the in vestigators will look for potential risks which could affect the

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company’s abil ity to perform its obliga tions, such as the company’s financi al capacity tofund the min ing project, its level of expertise and experience and its capacity to reim-burse financing. Red flag items could be large unfunded reserves for potential losses,outstanding mass litigation such as as bes tos or other product liability issues, ongoingcriminal investigations con cerning corruption, money laundering or other allegedcrimes, allegations of human rights abuses or environmental neglect, and other re-putational, fin ancial or legal issues. If a red flag issue is identified, permission will oftenbe requested to interview the company management, auditors and lawyers.

The investigators will draft a due diligence report describing the scope of the investiga -tion and the findings. The final due diligence report should be an im portant element indeciding whether to en trust a portion of the country's mineral resources to that inves-tor.

Due diligence reports are considered highly confidential and are sel dom shared.

C H O O S I N G T H E R I G H T L A W Y E R

For actual contract negotiations, one obvious ly needs lawyers.

Most IMCs and governments who work with outside counsel will choose internationallaw firms be cause they have a good reputa tion and seem experienced. But even bigfirms are only as good as the people assigned to the team. Smaller firms with good ex -perience in in ternational investment contra cts could be just as capable; some may evenbe more specialized, cheaper and more available. They are not balancing a diverseclient base and are less li kely to have con flict of interest issues.

When entering into the process of choos ing lawyers, it is useful to draft a narrow miss -ion statement with a breakdown of tasks (three negotiation meetings, com ments onfirst draft of the Mining Development Agreement or Con cession Ag reement, etc.) andassign budget numbers to each task in light of what the client thinks the work is worthand their overall budget envelope. Giving the law firm a broad mandate such as, “tonegotiate the mining project with staffing as necessary,” is a blank check best avoided.

Before meeting with any law firm, the miss ion statement should be sent to all of the

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candidates. Interviews should be set up with not only the partner who will man age thedeal but with as many members of the proposed team as possible, including the juniormembers who may be doing most of the work.

The client is en titled to not like certain lawyers and to evaluate independently the skilllevel of each member of the team. Language skills should also be verified. If the partnerspeaks French or Spanish, but none of the mid-level as sociates do, that language skillwill become very expensive. Governments can also request foreign firms to partner withlocal or national firms to train local lawyers.

Big firms are generally expen sive firms. Small firms can be just as co stly per hour (or, infact, per six minutes, the basic unit of legal billing) but will generally put fewer lawy erson the team, so the client may still get better value for its money. In either case, it is im -portant for governments to understand how their work will be staf fed. They should notbe afraid to insist on knowing the skill level of and the charges for each member of thelaw firm's proposed team, and to know why each person is included on the team.

Some times law firms offer to work for a fixed fee. This may seem desirable to a govern-ment, but in those cases, the work involved is normal ly fairly carefully described in thelawyer's fee letter, which can lead to budget overruns when the deal moves in unan-ticipated ways. And of course, the lawyer needs to understand the client's constraints. Itis no good having a brilliant brain in the room that can't relate. And of co urse, no clientshould keep a law firm on a job if it is not happy with the work.

A R E L A W Y E R S E N O U G H ?

It is important also to understand that legal skills are not the only skills needed in anegotiation. Some government negotiators believe they may have ended up with ad-verse results in past negotiations because there was too much concentration on lawy ersat the expense of other expertise. For example, many governments have only recentlystarted to look for help in creat ing financial models that will enable them to evaluateproposed terms and al ternative proposals. It can be dif ficult to find the necessary assis -tance for finan cial modeling, as these skills tend to congregate in consulting or invest-ment banking firms that are normally as expensive as law firms.

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Some government teams may also feel they lack sufficient knowledge of mine opera -tion and management, and the operation of world mineral markets. For example, agovernment negotiator may know that the contract should require pricing for royal tyand income tax purposes to be done on the basis of arm’s length deals, but have no ideawhat pricing methods to use if the inves tor is pro ducing primarily for its own use el -sewhere. Which of the many trans fer pricing mechanisms is most appropriate? Howcan the government avoid being blind-sided by customary pricing practices that, for ex-ample, lead to the appearance of unexpected "discounts“ in royalty computations?

Finally, govern ments may want access to peo ple who regularly track industry develop-ments. Sometimes negotiations can be affected by something as sim ple as failure tokeep up with the industry press. One negotiator remembers how he succeeded in gett-ing his government to withdraw an offer to one company after finding out somethingthey had done in another country in the region.

I S T H E R I G H T S U P P O R T A V A I L A B L E ?

Some government processes have a distinct impact on how help is hired. Most sizeablepieces of work will natural ly pass through public pro curement procedures, which willmost likely restrict bidders to companies of a certain size. And then there is always thequestion of cost; professional fees may be seen as prohibitive, even if they would help agovernment raise substantial ly more revenues in the deal.

There has been a surge of interest among international institutions in recent years inproviding support on the government side, in recognition of the fact that there are highstakes for economic development and even political governance. The Vale Colum biaCenter on Sustain able International Investment (VCC) and the Humboldt-ViadrinaSchool of Governance (HVSG) have compiled the details of many such initiatives, whichare available on the VCC's website. Many governments have welcomed these initiatives,but there are limitations to the nature of their support, and accessing their support cantake time. It may take up to two years or more for a regional development bank or inter-national financial institution to finance and deliver such support.

For some low-income countries, support for negotiations may be available on a reducedfee or pro bono (free) basis. For instance, the International Sen ior Lawy ers Project (ISLP)

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has provided high quality legal as sistance on a pro bono basis to a number of eligiblegovernments negotiat ing mining contracts.

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1 7 0 Y E A R S A T T H E T A B L E :C O N F E S S I O N S O F AN E G O T I A T O R

Some of the authors of this book have spent more time negotiating than they often careto admit. About 170 years in fact. This chapter runs through some tips that have beenhard won out of hundreds of hours facing off, digging in, in sisting, listening, and coax -ing.

T H E D I F F E R E N C E B E T W E E N P O S I T I O N S A N D I N -T E R E S T S

Negotiators too often state their positions as opposed to their underlying interests. Forexample, an IMC will state that it will not pay income tax above a certain rate and it willnot agree to a cap of deductible costs. Meanwhile the government will state that a largefront-end payment is mandatory and that taxes are pay able on the date of a com merci-al discovery.

If they were talking about their respective interests, the IMC would ex plain that it needsa minimum Intern al Rate of Return (IRR) on its capital to get approv al from its Board ofDirec tors, failing which its investment committee will not approve the pro ject. Thegovernment would state that it needs income as fast as possible, or it could face mount-ing polit ical pressures. When interests are clearly ex pressed, it is easi er to see where the

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parties can compromise.

W H E R E I T H A P P E N S C O U N T S

At some stage "negotiations" need to happen face to face, and here too there is a varietyof practice. Sometimes governments have companies come to them. Others choose aneutr al (al beit enjoy able) city, though this can be both a financi al and psycholog icalburden for the government negotiators. They might be in a great city, but they are noton familiar ground and are in the offices of a foreign law firm. There are even timeswhen substantive issues are affected by the need to catch a plane.

On the other hand, government negotiators may be able to give the negotiations theirfull attention if they are taken out of their home country and normal work flow. Athome, the lead negotiator might get a phone call from the President's office, for instan-ce, and just need to step out for "15 minutes." Then you don't see her again for the rest ofthe day.

To avoid the appearance of favoring one party or another, the parties may agree in ad-vance to rotate the negotiations among different locations.

T I M I N G A N D P A C E

Timing and pace are always important but never more so than at the face-to-face stage,when one or both parties might have travel led half way around the planet. The partiesshould set up a schedule ahead of time which al lows for any internal consultations.There is a natural tendency to treat and describe every thing as urgent. But if you give into that urge, it becomes harder to know which decision in the negotiation is impor tantfor what rea son. Parties will often say they do not have the authority to make a certaindecision. Sometimes that's true, sometimes it is only a ploy to gain time to consult.

If the way each side's decis ions need to be made is not discussed up front, it can lead tofrustration. IMCs often feel government decision-making is too slow. On the other handthey may not fully understand how many stages of consensus building government re-presentatives have to go through. If it is explained, at least the company representatives

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understand the reasons for the delay and can some times help, by offering to move toother questions while waiting for a response on a particular issue.

Likewise, when the government negotiators don't understand IMC proces ses, such asrequirements for Board of Directors or investment committee decisions, they can startto mistrust the IMC's intentions. Maybe the IMC has developed cold feet but just isn'tsaying so? Maybe it has decided to look for a better asset down the road?

B A L A N C I N G C O S T A N D B E N E F I T S / T R A D E O F F S A N DC O M P R O M I S E S

When should you compromise? When should you hold firm? These are impos siblequestions to an sw er in the abstract. But if you are clear about your time schedule andpriorities, it becomes a lot easier to find places to offer compromise without yielding onthe issues that are important to you. Before a negotiation session, it is valuable to havea list of the issues expected to come up, and to make sure that the members of thenegotiating team are agreed on the positions to be taken and on the al ternatives, if any,that might be offered to reach agreement. Creating a chart of issues and alternativeswill keep the team focused on the negotiations and on point. It may also avoid individu-al members of the negotiating team going off on an undesired frolic and detour.

Sometimes, though, consensus itself can be a pro blem. When the seven peo ple on theteam all need to agree on every th ing, things can take a while, particularly when a newpoint, not on the chart, drops on the table.

People employ all different kinds of techniques. Although a popular image is of toughstand-offs between the parties, all great negotiators li sten careful ly and usually re-spectful ly to what their co unterparts are saying even if there are sharp disag reements.In terms of timing and technique, some prefer not to move on from any given area untilevery point in it has been agreed. Others will try to pick off the easy ones, and leavemore time to focus on the difficult ones. Others seek out some non-essential points toconcede early in order to gain the trust and confidence of the other party. Negotiationscan also be isolated by groups of related subject matters, such as fiscal issues, permittiming, local development requirements, or reporting requirements.

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Whatever the met hod, the negotiating technique should be discussed and understoodamong the negotiating team.

G E T T I N G P A S T R O A D B L O C K S

Negotiating parties are likely to find themselves at an impasse at some point in thenegotiation. There are a number of ways to get out of it.

At the beginn ing, it is critical not to spend too long arguing about the point once the na-ture and magnitude of the disagreement is clear. People can become so emotionallycommitted to one point that they can not bring themselves to back down. If at all pos-sible, leave the issue for a while and con tinue negotiating other points.

Most blocking points are resolved by trading off compromises on dif ferent parts of themining agreement. If the parties are blocked on, say, the royal ty, they might considertrading a commun ity development undertaking. Or, if they are blocked on the tim ing ofpermits, and duration, they could trade off on fiscal measures. Another approach is toleave blocking points until the end so as not to get stuck and lose confidence during theprocess.

If no compromise can be found, each party can pass the issue up the chain. Some timesthere are even preexist ing separate negotiation teams comprised of high-level officersin the Government and in the IMC mandated to find com promises to blocking points.

W H O I S A T T H E T A B L E

The make-up of the negotiating team is discussed in some depth in the chapter, "TheNegotiating Table". The best outcomes usually involve a matrix of actors which includeboth local and nation al officials, local populations, NGOs and the IMC con cerned. Butthis doesn't mean every one can be at the table. Governments have the delicate task ofnegotiating in an ef fective mann er while providing suf ficient information to domesticactors to as sure them that their interests are not being ig nored. At times, governmentshave considered bringing civil society directly to the table, but as far as we are aware, ithas not happened yet.

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Secrecy of negotiations of co urse is a sensitive issue in terms of transparency. The aut-hors of this book support the concept of contract transparency. In fact, we have outlinedhow governments can actually avoid negotiations altogether by using a strict licens ingsystem and defin ing all terms in non-negotiable law. Or, the legal framework couldleave li mited aspects of the deal to negotiation or to competitive bids.

Nevertheless, when negotiations do take place, it is hard to see how, from a strictlylogistical point of view, they could pro ceed with total, real-time transparency. Everyseasoned negotiator has an ex ample of how leaks at crucial stages impacted a negotiat-ing position, usually for the worse. In one case, a government hardened its fiscal de-mands after one of its team picked up a home country com pany press release, pre-sumably directed at potential investors, detail ing just how promising the asset was. Onthe government side, polit ical leaders sometimes grandstand around single issues,which pus hes their negotiating teams into a corner. It seems as though a certainamount of con fidentiality, for a certain time, is what al lows negotiators to negotiate.

Lastly, there is no such thing as too much information and know ledge. Big IMCs arewell-financed knowledge mac hines with rigorous standards of excellence across a widerange of disciplines. Governments are often at a resource - and therefore a knowledge -disadvantage, even when they have statuto ry access to much of the same infor ma tion.For example, even though a government's geological survey might have the right to ob-tain and access surveys carried out by the IMC, they may have less capacity to interpretthe data they see, or to connect it to the latest trends in world markets.

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D I S P U T E A V O I D A N C E A N DR E S O L U T I O N

Mining contracts - like any other legal bond - can fall apart. The parties, the pro ject, theeconomy, and other forces and factors can turn a once-happy marriage into a strainedrelationship and even wind up in divorce.

Disputes can arise over many is sues, including compliance with performance obliga-tions, failures to meet social or environmental obligations during the developmentphase, and interpretation of is sues relating to mine closure.

How do the government and mining company handle disputes? There are a variety ofcontract tools available to help keep things running smoothly.

T A L K I T O U T – A L L O W I N G F O R R E V I E W S A N D C O N -S U L T A T I O N

One option is to ins ist on "obligatory" periodic contract reviews that force the partiestogether to deal with changed circumstances. If there is dissatisfaction, the parties cannegotiate to modify the financial and other terms of the deal in order to maintain thebalance the parties had intended. Having scheduled consultations can minimizefrustration and ease tensions if one of the parties feels that the deal is no longer fair,preventing rash judgments that might lead a com pany to pull out of a country or agovernment to nationalize a mine.

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As an example, Article 31 of the Liberia-Putu (2010) ag reement states that the Govern-ment and company "shall meet once every five (5) years after the date hereof or earli er,if one party reasonably considers a Profound Change in Circumstances to have occur-red, to establish whether or not a Profound Chan ge in Circumstances has occurred."

Some contra cts contain other forms of negotiation and mediation obligations thatbring the parties to the table when disagreements arise. They en courage the parties toaddress their issues - either alone or with the as sistance of a neutral mediator – and soavoid the need to escalate the dispute.

Article 32 of the Afghanistan-Qara Zaghan (2011) contract states:

"Either party to the contract should try to manage and resolve conflictsarising from disagreement in the interpretation of the contract, vianegotiations, mutual agreement and other non-confrontationalmeans. Both sides should resolve their conflict within sixty (60) daysafter receiv ing written notice of an issue related to the contract."

W H E N T A L K I N G F A I L S - F O R M A L M E A S U R E S F O R R E -S O L V I N G C O N T R A C T D I S P U T E S

When regular renegotiations or mediations do not work, contracts provide for otherformal met hods of dispute resolution. Dispute resolution provisions typical ly have atleast two important components: the law that will govern the dispute and the methodof resolving the disputes. The law governing the mining agreements can be totally in-dependent from the method used to resol ve disputes.

There are two major ways to formal ly resolve a dispute: either through domes tic co urtsor internation al arbitration.

Which Law Applies?The issue of applicable or governing law can be hugely im portant. The follow ingscenarios help illustrate why:

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Scenario One - a contract requires the government to ensure that the conces sionairehas access to land necessary for its opera tions. After the government starts taking ac-tion to re move indigenous people from the land, those affected communities pursuelegal action in domestic court, which rules that the government's contractu al prom iseviolates domestic and international human rights law, and bars the government fromtaking further steps to make way for the mining project. The company sues the govern -ment for breaching its obligation to secure access to the land. Under applicable law, isthe government excused from hav ing to comply with its contract prom ise?

Scenario Two - a contract includes an environmental "freezing" pro vision. The govern-ment has amended its en vironmental law, providing private citizens with new rights tosue companies, and strengthening pollution standards. As a result of the new law, thecompany has been ordered to pay significant sums to local com munities. The com panyargues that by enacting the new law, the government has breached the contract, andnow owes the company damages amounting to its litiga tion fees and the sums owed tothe private parties. The government defends itself by arguing that the broad stabiliza-tion pro vision in the contract is void and unenforceable under domestic contract lawbecause it is in consistent with public policy and unconstitutional. Under applicable law,will the govern ment be bound by its promise?

These examples show why governments general ly want their own law to be the onethat governs all aspects of a mining project, as it will give them the greatest control overthe shape the project, the contract, and the parties' rights and obligations under it. Formining contracts, which can pose major opportunities and challenges for the govern-ment, co unt ries naturally want to leave as little to chance as possible. Reflecting thisconcern, many contra cts state that the law of the country hosting the mine will governop eration of the project, interpretation and applica tion of the contract, and the parties'rights and obligations.

For example, Article 39 of the AKNR-Afghanistan contract states:

"This contract is subject and governed by all applicable Laws and Re-gulations of the Government of Afghanistan."

Similarly, but more comprehensively, Article 20.2 of the Liberia-Putu contract states:

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"This Agreement and the rights, obligations and duties of the partieshereunder shall be construed and interpreted in accordance with Li-berian Law."

While states gain certainty by using these types of provisions, they may cause an equalmeasure of uncertainty among investors nerv ous about being at the mercy of the hoststate's law - par ticular ly if relations between the parties eventual ly sour. Concerns aboutcor ruption or a lack of judicial independence can intens ify an inves tor's desire to find adecision maker that is insulated from domestic pressures. In order to ease those con-cerns, investors sometimes get the government to agree to resolve disputes in the co-urts of the investor's home co untry, or they push for arbitration. But if the country hasan efficient and indepen dent judiciary, it may be difficult to insist on arbitration and/orshifting the litigation overseas.

Even when it is ag reed that national law does apply, inves tors have certain legal tools attheir dis pos al to protect themselves against government action. While falling out sidethe contract, bilateral or multilateral investment treaties can be used to further definethe parties' rights and obliga tions under the deal. These are discussed at the end of thischapter.

Arbitration ver sus LitigationOnce it is clear what law applies, there is then the question of whether to pursue thepath of arbitration or litigation in the courts. This choice of procedure is important.There are a number of major dif ferences between arbitration and litigation. These re-late to the identity of the decisionmaker, the powers of the decisionmaker, the locationof the proceedings, the procedures and rules of evidence that apply, the ethical rulesthat will apply to the attorneys and the decisionmaker, the openness of the proceedingsand the ab il ity of non-parties to access and participate in them, the speed and cost ofthe proceedings, and the final ity and enforceabil ity of awards or judgments.

Arbitration pro ceedings have many fea tures that parties may see as advantageous.Such proceedings are typical ly confidential. There are many good international ar-bitrators to choose from, as opposed to taking chances before a judge who may or maynot be knowledge able, independent or honest. And there are special rules of finalityand enforceability of arbitral awards in arbitration rules, domes tic laws, and inter-

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national treaties (discussed furth er below) that are desig ned to both speed the processof getting a final award and ensure that, once that award is issued, the victori ous partycan en force it.

But there are some dis advantages. They are ex pensive, are slow er than some wouldthink, and their finality can be a disadvantage given that the parties only have onechance to make their case before the arbitral tribunal. The grounds for appeal or to re-quest a state not to execute an arbitral award are particularly narrow. Moreover, theclosed nature of the proceedings - and sometimes their outcomes - are often criticizedas being inconsistent with principles of good governance, accountability, and trans-parency.

If courts are used, the rules and pro cedures regarding which particular court will takethe case and how it will handle it are general ly spel led out in the law.

In contra st, in arbitration, the parties and the arbitrator(s) have much more freedom todecide just how they want to do th ings. Contracts - intentionally or inadvertently -sometimes leave those issues open. This means that the parties will have to resolvethem when they are already embroiled in their dispute. Some contracts do at least try tosettle as many questions in advance as pos sible by specifying the procedural rules thatwill apply and the "seat" of the arbitration.

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The Path of Arbitra tionThere are various sets of preestablis hed procedural rules for arbitration, including thoseof the Lon don Court of International Arbitration (LCIA), the United Na tions Commiss-ion on Internation al Trade Law (UNCITRAL), the World Bank's International Centre forSettlement of Investment Disputes (ICSID), the International Chamber of Commerce(ICC), and Stockholm Chamber of Commerce (SCC). These contain pro visions on a hostof issues including the qualifications of the arbitrators, the number of arbitrators thatwill resolve disputes, the met hods of appointing arbitrators, the powers of ar bitrators,the conduct of the pro ceedings, the confidentiality or transparency of the dis pute andits outcome, the type of relief or compensation that can be awarded, the force ofawards, and the fees and costs of the arbitrations. If a contract specif ies one of thesesets of rules, the parties will get that package. A defining feature of arbitration, howev -er, is that the parties to the dis pute generally retain a lot of freedom before and duringthe dispute to agree to modify the rules and shape the pro ceedings as they see fit.

As an ex ample of an arbitra tion clause, the AKNR-Afghanistan agree ment states:

"If unable to reach a solution, as per the Mineral Laws, then both sideshereby agree to refer their disagreement to arbitration which shall bethe Internation al Court of Arbitration as the independent arbitrator."

In this case, the reference to the International Court of Arbitration is not very clear asthere are several International Co urts of Arbitration (London, Paris, etc.), each of whichhas its own rules of procedure. It seems to imply that the parties only want one ar-bitrator (as opposed to three, which is more typical under many rules), but this too isnot very clear.

The Liberia-Putu agreement (Art. 27) is more specific on these issues, stating:

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"Where the mediator’s recommendation(s) are rejected by either of theparties and it is evident that further direct negotiations will not resolveor settle the dispute, controversy or claim, the matter shall be submit-ted to arbitra tion pursuant to Section 27.2....

Any Dispute between the Government and the Com pany not settledpursuant to Section 27.1 shall be referred to and final ly resol ved by ar-bitration conduc ted in accordance with the UN CITRAL Rules. Any sucharbitration shall be adminis tered by the LCIA."

Some contracts then add even more detail about the exact procedures and pow ers ofthe arbitrators, whether doing so in order to better set the applic able rules in stone, orto modify those rules so as to best suit their needs.

The "Seat" of the Ar bitrationArbitration is often described as being "de-localized" meaning that it is a proceedingthat can be largely divorced from and independent of background principles of law thatmight otherwise apply to the pro ceedings. If, for example, the contract states that UN -CITRAL rules of arbitration will apply in a dispute, those rules will govern irrespective ofwhether the arbitra tion hearing happens in Santiago, Nairobi, London, Paris, or NewYork.

That said, the governing law of the "seat" of arbitra tion is im portant. The "seat" has aspecial meaning. While the term "seat" implies that it is the place of the arbitration, asnoted above, it is not neces sarily the actual place where the arbitration is conducted. Itis entirely possible for arbitrators to hold hearings in Singapore but for the arbitra tionto have its "seat" in the Netherlands. The "seat" is important because the law of the seatwill fill in gaps left by arbitral rules, impact the role of courts with regard to the role ofarbitrators, and might even override certain arbitration rules. The law of the seat caneven influ ence the ultimate enforceability of any resulting award.

Because of the im portance of the seat, many contra cts specify what it will be. While thegovernment will often want its jurisdic tion to play that role, a foreign inves tor willfrequent ly have other ideas.

The Mongolia - Oyu Tolgoi agreement illustrates the levels of specific ity now frequently

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provided. In Article 14.2 it clarifies that UN CITRAL Rules will apply in case of arbitra tion,that there shall be 3 arbitrators, the language of arbitration shall be English, the ar-bitrators will apply the laws and re gulations of Mon golia to interpretation of the agree-ment, but the place of arbitration shall be London, and the arbitral proceedings ad -ministered under UNCITRAL Rules by the London Court of International Arbitration.

EnforcementOnce arbitrators issue an award, the winning party can take it to court to collect itswinnings. Two treaties make this relatively easy for victors by nar rowing the grounds forchalleng ing or resist ing enforcement of any award. These treaties are the 1958 Conven-tion on the Recognition and Enforcement of Foreign Arbitral Awards (the "New YorkConvention") and the 1965 Convention on the Settle ment of Invest ment Disputes bet-ween States and Nation als of Other States (the "ICSID Convention"). Each has roughly150 memb er states. One key difference between the two treaties is that the New YorkConvention permits awards to be chal lenged if they are inconsistent with public poli cy.The ICSID Conven tion does not.

There is cur rently no similarly broad multilateral treaty that makes for easy enforce-ment of judici al awards. The Hague Convention on the Enforcement of Judgments inCivil and Commerci al Matters provides mechanisms to enforce judicial judgments be-fore domes tic courts, but has not yet entered into force due to a lack of ratify ing states.The Brussels Convention on the Enforcement of Civil and Commerci al Judgments is asimilar treaty and is in force, but has a limited scope: It helps winning parties domiciledin European Union (EU) member states enforce judgments in other EU states. It doesnot have the broad reach that the New York Convention and the ICSID Convention do.

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Extra-Contractual Protec tions for Investors and Restrictions on StatePower: The Role of Investment TreatiesPerhaps the most important extra-contractual legal protection for foreign mining com -panies is what is known as an "investment treaty". Investment treaties are agreementsbetween states in which each state party promises to provide certain types of treatmentto investors from the other state party. States commit to treat foreign com panies "fairlyand equitab ly"; to pay compensation if the government expropriates any foreign com-pany's property; to treat foreign companies as well as domestic companies and com-panies from other countries; to provide companies' investments "full protection andsecurity"; and to permit foreign companies to freely transf er money in and out of the co-untry. Some in vestment treaties also contain pro visions restricting governments' abilit-ies to impose conditions and re quirements on foreign companies, such as joint venturerequirements, requirements to procure goods or services loc ally, and requirements totransfer technology.

Importantly, in addition to provid ing these protections for foreign companies, invest-ment treaties give foreign companies a strong procedural tool: the ability to enforcethose protections. With few exceptions (e.g., in certain human rights treaties), mosttypes of treaties only allow states to initiate disputes and seek remedies for breach ofthe treaty. But in a not able departure from that pattern, investment treaties allowforeign companies to sue their host governments directly and seek com pensation forharms they have suffered as a result of the treaty breach. The cases are decided in ar-bitration.

If a foreign investor is covered by one of these treat ies - of which there are now over3000 worldwide - it thus gets an extra layer of pro tec tion.

To show what this means: If a government pas ses a law expropriating the mine, and alocal court determines that the govern ment does not need to pay the company anycompensation for that "taking", the company could potentially use the investmenttreaty to sue the state and seek compensa tion from the government for an expropria-tion.

To date, compan ies have used in vestment treat ies to chal lenge a number of govern-ment actions and inactions, many of which relate to disputes arising in mining andother extractives projects. These include cases argu ing that:

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the government expropriated a com pany's property when it revoked the company'soperating permit;

the government expropriated a company's proper ty and failed to treat it "fairly andequitably" when it sought to require backfilling of the mine;

the govern ment imposed impermissible "performance requirements" on a com -pany when it required it to invest in research and development;

the govern ment discriminated against a company when it took enforcement actionagainst it for violation of environ mental requirements but did not take similar ac-tion against other companies;

the government violated the "full pro tection and security" obligation because itfailed to pro tect the investment from losses and dis ruptions caused by localcitizens; and

the government expropriated a company through a law requiring mining compan-ies to sell equity in terests to historically disadvantaged groups.

Compliance with domestic law is not a defense to a breach of an investment treaty (orinternational law more generally). Even if the government's action is entirely consistentwith its own law, it may still be inconsistent with the investment treaty.

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P L A N N I N G F O R T R O U B L E

A host of tricky legal issues can arise during lifetime of a pro ject. Contracts try to ac-count for such eventualities through a variety of relatively standard clauses. This chapt-er briefly explains some of these clauses and what to look for.

T R A N S F E R / A S S I G N M E N T O F R I G H T S A N D O B L I G A -T I O N S , A N D C H A N G E O F C O N T R O L

The contract needs to address which party can transf er its rights and obligations towhom, when and under what conditions. Do you need the other parties’ prior approval?Prior notice only? Veto right? First of right refus al?

Parties that do not include a provision that covers these issues could find themselvesstuck with a partner they do not know and do not like. Moreov er, such a provision is anecessary precon dition to allow the government to tax the profits of a sale of assets;without rules on transfers, and corresponding fiscal tools, inves tors have been able tosell their mining rights for millions or bill ions of dol lars without paying any taxes on thesale to the state.

More recently, some governments are also requiring in formation about beneficial ow -nership up the chain. This is both an anti-corruption measure and an aid in detectingand asserting tax obligations when off-shore gains are taxed.

Transfer fees or capital gains taxes are discussed in the chapter, "Fiscal Regimes".

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A C C O U N T I N G , A U D I T A N D R E P O R T I N G O B L I G A T I O N S

A mining contract provides for many different types of payments to be made over along period of time. And in countries that have yet to develop comprehensive miningregulatory re gimes that include reporting requirements, the mining contract may in-clude such reporting requirements. It is important that the contract is clear about pay-ments to be made (assuming such information is included in the contract rather thanlegisla tion), including when, where, how and how much, and the contract should beclear about the content and timing of required reports.

A careful government will normally seek regular operating reports giving quantitativeinformation as to the progress of a company's operations, plus quarterly financial state-ments and audited annual financial statements. If the parent IMC is not a public com -pany with readi ly avail able financial in formation, the government may want to requireits financial statements as well, particularly if it is a guaran tor of the obligations of itslocal subsidiary. The contract should also have provisions that give the government theright to review data un derlying payment computations or operating reports.

T E R M I N A T I O N

When parties sign a mining agreement, they are in a sense getting married. Those thatmarry may need to divorce.

Thus, mining agreements should specify which parties can terminate the mining agree-ments and under which circumstances. There is always a provision that permits ter-mination by one party if the other party is in default in the performance of its obliga-tions under the contract, al though that is often heavily qualified by various provisionsrequiring the defaulting party to be given notice of the default and an opportunity tocure the default. But sometimes the parties fail to consid er the consequences of a de-fault termination: who owes what to whom, and what happens to the mine as sets, ifany, already in place.

The parties may also agree on the situa tions in which a party may itself terminate thecontract and walk away -- in a sense, a no-fault divorce. In this case, they still need tospecify what happens to the mine as sets and whether (and when, if at all) the decision

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to walk away should trigger any payment obliga tion.

Termination clauses are essential and rarely discus sed until the very end of negotiationsand yet, they will determine the end of the marriage. All parties should think carefullyand discuss how they can “get out” of the marriage, and make sure that the miningcontract clearly sets forth all of the possibilities and the consequences of termina tionfor each type of termination.

S O L V E N C Y O F T H E M I N I N G C O M P A N Y

Most IMCs con duct their mining operations through com panies that have no assetsother than the relevant mining license or contract, the mine operating assets, and, per-haps, the contracts for sale of the mine output. The parent IMC is not a party to the min-ing contract, and the company's cash needs are co vered by funds from the parent com -pany, normally provided on an as-needed basis.

This means that if the operating company gets in trouble, or falls behind on pay mentsto the state, the state has no access to funds unless the IMC chooses to continue fund-ing its operat ing subsidiary. Governments deal with this risk by requiring the parentcompany to guaran tee the liabilit ies of its subsidiary. The amount of such guarantees,and the conditions under which they can be called upon, involve fairly complex legal is-sues relating to actions that must be taken in order to call upon a guarantee. Govern-ments should not attempt to negotiate such terms without lawy ers experienced in suchmatters.

Often, particularly with small er IMCs which may have weaker financial structures,governments in sist on receiving guarantees (often in the form of letters of credit) fromsolvent financial institutions. The amounts of such guarantees are negotiable butusually represent a percentage of the overall estimated value of the contract. Again,such instruments in volve a highly technical corner of the law and expert legal skills areessential.

A government may also consider what would be the consequences for the mine as setsunder local law should a mining company declare bankruptcy. In many cases, the min-ing company will have given its lenders a mortgage on the mine as sets in order to finan-

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ce mine construction. It may be necessary for the government to consent to such amortgage in order to enable the construction of the mine, but if it does so, it should re-quire, in the min ing contract, that the lenders cannot dis mantle the mine and sell offthe assets piecemeal without the consent of the state.

A good lawyer and a wise banker can help the government negotiators think throughthese is sues.

C O R R U P T I O N

Despite increasing at tention to the issue, corruption remains a challenge in many juris-dictions. In the last few years, many countries have fol lowed the lead of the UnitedStates Foreign Corrupt Practices Act, and have pas sed and have begun to enforce lawsthat levy heavy penalties on companies that participate, directly or indirectly, in briberyof government of fici als. For this reason and business reasons, the large mining com-panies subject to such laws have become much more careful about the people withwhom they do business and the way they conduct busi ness.

As a result, if a li cense is is sued to a smaller company and the surrounding circumstan-ces suggest corruption, the li censee may find it impossible, after it makes a discovery, tobring in a partner with the financi al capacity needed to develop the mine even if corrup-tion cannot be proven. This may mean that the state has a valuable mineral asset heldby a com pany that is not tech nically in default under its license, but which is also un-able to go forward with mine development.

The moral, of course, is that governments may need to consider more carefully thanthey sometimes do the nature of the persons to whom they are issuing mining licensesand awarding min ing contracts - not always easy to do in a mining regime in whichpriority is determined by time of filing a claim.

In regimes which require exploration or mining contracts, this is somewhat easier todeal with if the contract form requires representation that the contract recipient has notcar ried out any corrupt ac tivities (which can be described in some detail) in connec tionwith obtain ing the contract. Breach of this representation can give the government theright to terminate the contract.

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T O P U B L I S H O R N O T T OP U B L I S H ?

Traditionally, mining contra cts have been shrouded in secrecy. In some cases, they arenot even shared within government. Even agencies with responsibilities relating tomining opera tions are sometimes not able to see the underlying contract. Certainlythose not party to the agreement can only guess at the terms. This is in line withtraditional standard practice going beyond the extractive industries sector. Yet themerits of keeping deals confidential are increasingly ques tioned by governments andcivil society, and even by some companies. Governments are becoming more and moreopen about their procurement and contracts with private parties. This trend is extend-ing to mining, where transparency is increasingly the norm.

E V O L V I N G B A S E S F O R D I S C L O S U R E

A growing number of governments now publish mining contracts, including Liberia,Peru, DRC, Guinea and Afghanistan. Some have legislated to require disclosure. For ex-ample, Liberia’s Extractive In dustries Transparency Initiative (LEITI) law mandates LEITIto “serve as one of the national depositories of all concess ions, contracts, and licensesand similar agreements and rights granted by the Government of Liberia to individualsand compan ies in respect of the logging, mining, oil, forestry, agriculture and other de-signated sectors; and to grant members of the public access to such concessions and ag-reements in keeping with their status as public documents.”

The law goes on to state that:

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"For the purpose of this Act, contract trans parency shall mean (1) publicaccessibility of material concessions/licenses and ag reements relatedto the sectors within the scope of the LEITI as per Section 5.4 hereof;and (2) the post-award review and/or audit of the pro cess by andthrough which concess ions, contracts, and licenses are awarded for ex-ploration and/or exploitation of minerals, forests and other resourcesin order to ascertain that each award was made in compliance withapplicable laws."

A few governments disclose in accordance with broader constitutional or freedom of in-formation commitments. For ex ample, Article 150 of the constitution of Niger states:

"Les contrats de pro spection et d'exploitation des resources naturelleset du sous-sol ainsi que les revenus versés à l'État, désagrégés, sociétépar société, sont intégralement publiés au Journal Officiel de la Répub-lique du Niger."

[Contracts for exploration and ex ploitation of natural resources and thesub-soil as well as in come paid to the State, dis aggregated, companyby company, are published in full in the Official Journal of the Republicof Niger.]

Some, such as Guinea and DRC, simply publish pursuant to voluntary commitments,not backed by any law. In some countries, mining agreements are ratified by Parlia-ment and therefore should auto matical ly be in the public domain.

Some contracts also become public ly available via the investor. Most commonly, theseare re vealed through filings with regulators, such as those in Canada and the Uni tedStates, by firms li sted on Toronto and New York stock ex changes. These will includecontracts that may not have been made public by the government. For example, themining com pany SEMAFO has three separate contra cts filed under the Canadiansecurities database SEDAR (Sys tem for Electronic Document Analysis and Retriev al), in-cluding their contract with the government of Burkina Faso.

It remains rare for the contract itself to specify that it will be disclosed. Howev er, in co-unt ries that have adopted contract transparency, you will find an absence of confiden-tiality clauses or even language specifying publication in newer agreements. For exam-

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ple, the Liberia- Western Clust er agreement states in Article 33:10 that "The Govern-ment shall make public this Agreement and any amendments or written interpreta-tions of this Agreement."

Such clauses align with the recommended language in the MMDA states at section 30.1(a):

"This Agreement and the documents required to be submitted underSection 2.4, by any past and present parties is a public document, andshall be open to free inspec tion by members of the public at theappropriate State office and at the files desig nated in the follow ingsubsection (e), and at the Company’s office in the State during normaloffice hours."

Similar language is now being incorporated into individual co untry model agreements.

I S D I S C L O S U R E A B R E A C H O F C O N T R A C T ?

How is publication of existing deals reconciled with the ex istence of confidentialityclauses? When examined closely, the idea that current ag reements must remain secretis a myth. Most governments could publish their mining contracts without risk of legalconsequence.

Confidential ity clauses may be more nuanced than ex pected. Typically, restrictions arelimited to “informa tion and data” and not necessari ly the contract itself. For ex ample,the Australia-McArthur River Project agreement specifies (Article 24) that:

"Except to the extent otherw ise required by law or the Stock ExchangeListing Rules, the Territory and the Company agree that a party shallnot make pub lic any confidenti al information provided by the otherparty pursuant to this Agreement without first obtaining the consent ofthe other party."

The Sierra Leone - Sierra Rutile contract similarly notes:

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"The Government will keep confidential all in formation provided to itby the Com pany, whether before or after the date of this Ag reementand confirms that it shall not disclose such information to any thirdparty with out the Company's prior written consent."

There is certainly no shortage of data generated in relation to a modern mining opera-tion – seismic, geological, drilling and trading data. Much of this may be justifiably pro-prietary or com mercially sensitive. Yet such information does not surface in miningcontract documents.

Where disclosure has occurred, it has not ten ded to generate opposi tion from eitherparty. Even where the law does not require disclosure, as in Guinea, the governmenthas dis closed agreements retro actively without issue.

Moreover, many contracts are al ready available if you are able and will ing to pay to ac-cess high-cost commercial databases. These are typical ly used within industry. So, de-spite the legal grey area, companies are regularly accessing agreements of competitors,which questions the validity of alleged concerns about disclosing com mercial sensitiv-ity. The real issue is asymmetric access to contract data-- not the un availability of suchdata.

How to Do it?As with many newer trends, the nuts and bolts of the process are still being tested. Incountries where contra ct transparency is required, there can be am biguities as to the“what, when, where, who and how” of disclosure. Neith er relevant legislation nor thecontract itself may specify when the contract should be made publicly available. It maynot specify where contracts will be available – published in newspapers, in the nationalgazette, on a dedicated government website? In some cases, only a summary of keyterms is made available (this remains an opt ion for com panies in projects with IFC in-vestment). But who determines what is “key”?

In Liberia, contracts are published on the multi-stakeholder LEITI website. In Guinea,the government created a dedicated website to post all contracts with annotations ofkey provisions to facilitate understanding of the key terms (contratsminiersguinee.org).

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Why Publish?Perhaps the real question should be “why not”? Putting contract terms in the publicdomain can be reassuring to investors and local stakeholders alike. Of ficials negotiatingon behalf of their governments may be even more careful to ensure they protect thepublic interest when they know the resulting deal will be made public. Publication canhelp build trust between contra cting parties and society. It can avoid misperceptionsaround the contents of the agreements. This is important for government, but also forthe mining company, which may become a local presence for decades. Publication en-ables broader an alysis of the deal. Above all, it can facilitate more ef fective monitoringof contract implementation both by government and by third parties. For example, civilsociety groups are active ly monitoring compliance with particular contractual obliga-tions in countries as diverse as Peru, Burkina Faso, Afghanistan and Canada. Compan-ies, too, are also keen to analyze deals awarded to competitors and are often the mostvigilant in noting possible indications of corruption.

Such motivations help explain why contract disclosure is now recom mended goodpractice accord ing to the World Bank and the International Monetary Fund. The IFC re-quires the disclosure of the principal contract for mining pro jects in which it invests. Anumber of companies, such as Rio Tinto, have stated that they have no objection tocontract disclosure. It is in line with ICMM’s principles. The new EITI standard en-courages participating countries to dis close contra cts or to ex plain the basis for non-disclosure. This is prompting additional countries, such as Senegal and Mozam bique,to commit to making mining contracts transparent, going forward. The Open Contract -ing Partnership, a new multi-stakeholder effort, is developing a standard for release ofcontract informa tion, including an adaptation for extractives contracts.

A P P E N D I X

G L O S S A R Y

L I S T O F C O M M O N L Y R E F E R E N C E D C O N T R A C T S

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G L O S S A R Y

(Terms as used in this book)

A M O R T I Z A T I O N

Process of decreasing an amount owed over a period. It ref ers to paying debt consistingof interest and part of the princip al by making regular pay ments over a period of time.

B I O M E

Major ecological community type often referred to as an ecosystem.

B R O W N F I E L D

Investment in existing infrastructure.

C A P I T A L E X P E N D I T U R E ( C A P E X )

Money invested to buy or upgrade a fixed asset (e.g., building or machinery) that willcreate future benefits that extends beyond the tax year. Its counterpart, operating ex-penditure (OPEX), is the cost of running it. The purchase of a photocopier, for example,would in volve CAPEX, while the paper and toner represents OPEX.

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C O N S O R T I U M

Business agreement where parties agree to participate in a common activ ity or pooltheir resources in order to achieve a common goal. Each party retains its separate legalstatus and the con sortium's control is limited and delineated in the contract.

D E P R E C I A T I O N

Decrease or loss in value because of age, wear or market conditions. In accountancy, itrefers to two aspects of the same con cept: (a) the decrease in value of assets, and (b) thealloca tion of the cost of assets to periods in which the assets are used. It can be used asan income tax deduction that allows a taxpay er to recov er the cost or other basis of cer-tain property.

D O U B L E T A X A T I O N P R I N C I P L E

Refers to income taxes that are paid twice on the same source of income. It occurs whencor porations are considered separate legal entities from their shareholders and bothpay taxes (corporations over their earnings and sharehold ers over the di vidends). It isoften mitigated by tax treaties between countries.

D U E D I L I G E N C E

Investigation carried out by a party to learn and ver ify the full background, history andcurrent situation of a party with which it may contract or an asset it may acquire.

E C O N O M I E S O F S C A L E

Occurring when the cost per unit of out put diminishes with the increas ing scale of theproject as fixed costs are spread out over more units of pro duction.

E C O N O M I E S O F S C O P E

In the context of a mining and related infrastructure operation, such econom ies ofscope will arise when the outputs of one type of infrastructure can be used as the inputsof another type of infrastructure.

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F L Y R O C K

Rocks blown up or broken apart by explosives.

F R E E O N B O A R D ( F O B )

Trade term re quiring the sell er to deliver goods on board a ves sel designated by thebuyer. It means that the supplier/seller pays for trans portation of the goods.

F R E E P R I O R A N D I N F O R M E D C O N S E N T ( F P I C )

Principle that indigenous communities have the right to give or withhold their con sentto proposed projects that may affect the lands they cus tomari ly own, occupy or otherw-ise use. In the context of mining, is increasingly being advocated to include other com-munities that will be af fected by mining pro jects.

G R E E N F I E L D

Investment in new assets (mine or infrastructure) with no pre-existence.

H E D G I N G

Investment position in tended to offset potential losses/gains that may be incurred by acompanion investment. In simple language, a hedge is a technique used to reduce anysubstantial losses/gains suffered by an in dividual or an organization.

H O M E C O U N T R Y

Country where an investor is resident.

H O S T C O U N T R Y

Country where an in vestment is made. Often referred to when the investment is madeby a foreign investor.

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I N T E R N A T I O N A L M I N I N G C O M P A N Y ( I M C )

Used to refer to foreign mining companies.

I N V E S T M E N T T R E A T Y

Agreement between states in which they commit to provide covered foreign investorsspecial substan tive and procedural protections. An investment treaty may be a bi lateralinvestment treaty (BIT), multilateral investment treaty, or invest ment chapter that ispart of a bilateral or multilater al free trade agreement.

J O I N T V E N T U R E ( J V ) A G R E E M E N T

Agreement where two or more companies agree to share profit, loss and control in acertain project. This is common where the project is too big for a single com pany to fin-ance on its own. Partners can be from both the public and private sectors.

L O N D O N M E T A L S E X C H A N G E

Center for industrial met als trading and price-risk management. More than 80% ofglobal non-ferrous business is conducted here. Its prices are used as the global be-nchmark.

N A T I O N A L M I N I N G C O M P A N Y ( N M C )

Some times used to refer to a state-owned mining company.

O P E R A T I N G E X P E N D I T U R E ( O P E X )

Ongoing expense that a business incurs for performing its norm al business opera tions.Its counterpart CAPEX is the cost of buying it. The purchase of a photocopier, for exam-ple, would involve CAPEX while purchase of the paper and toner represents OPEX.

O P P O R T U N I T Y C O S T

Value of the best alter native forgone in a situa tion in which a choice needs to be madebetween several mutually ex clusive alternatives (e.g., extract or not).

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R E N T

Revenue stream that accrues above and beyond a normal economic return on activity orprofit. The concept was first developed by economists Adam Smith and David Ricardoin the 18 and 19 centuries. It dominates the economics of the global mining industrybecause of sharply varying cost of pro duction for a com modity sold at roughly the sameprice. Economists differen tiate between rent and a norm al return on capital, or pro fit,and argue that it should be treated differently. Rent encourages rent seeking, an integr-al part of the con cept of Resour ce Curse.

R I G H T - O F - W A Y

Type of easement granted or reserved over the land for trans portation purposes.

S O C I A L L I C E N S E T O O P E R A T E

Concept ex pressing the ongoing acceptance of the project by the surrounding com -munity.

T A I L I N G

Material left over after the extraction of ore.

T R A N S F E R P R I C I N G

Price at which divisions of mining (or other) compan ies transact with each other. Trans-actions may include the trade of supplies or services among the parties. This price isbelow the mar ket price.

W A S T E R O C K

Rock that must be removed in order to gain access to the desired mineral.

th th

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L I S T O F C O M M O N L Y R E -F E R E N C E D C O N T R A C T S

Afghanistan: Qara Zaghan Gold Project Contract between Krystal Natural ResourcesCompany and the Ministry of Mines of the Islamic Republic of Afghanistan (January 10,2011) ("Afghanis tan - Qara Zaghan (2011)")

Australia: McArthur River Pro ject Agreement between the Northern Territory ofAustralia and Mount Isa Mines Ltd. (May 4, 2007) ("Australia - McArthur River Project(2007)")

Democratic Republic of the Congo: Avenant No. 1 à la Minière Amendée et Reformuléedu Septembre 2005 entre République Démocratique du Congo et La Générale desCarriéres et des Mines et Lundin Holdings Ltd. et Tenke Fungurume Mining S.A.R.L.(December 11, 2010) ("DRC - Tenke Fungurume (2010)")

Ecuador: Contrato de Explotacion Minera Otorgado por Ministerio de RecursosNaturales no Renov ables a favor de La Compañía Ecuacorriente S.A. (March 5, 2012)("Ecuador - Ecuacorriente (2012)")

Guinea: Conven tion de Base Entre La République de Guinée et BSG Resources (16 De-cembre 2009) ("Guinée - Zogota, (2009)")

Guinea: Convention de Base Entre La République de Guinée et Alliance Mining Com-modities (Juin 2010) ("Guinée - Koumbia (2010)")

Guinea: Conven tion de Base Entre La République de Guinée et Simf er SA La SociétéPour L'Exploitation des Gisements de fer de Simandou (26 Novembre 2002) ("Guinée -Simfer (2002)")

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Liberia: Mineral Development Ag reement between the Government of the Republic ofLiberia, China-Union (Hong Kong) Mining Co., Ltd. and China-Union Investment (Li -beria) Bong Mines Co., Ltd. (January 19, 2009) ("Li beria - China Union (2009)")

Liberia: Ex ploration Ag reement between the Government of the Republic of Liberia andAfrican Aura Resources Limited (February, 27, 2004) ("Liberia - Africa Aura Resources(2004)")

Liberia: Amen ded Mineral Development Agreement between the Government of theRepublic of Liberia and Mittal Steel Holding A.G. and Mitt al Steel (Liberia) Holdings Ltd.(December 28, 2006, amending the agreement of August 17, 2005) ("Li beria - Mittal(2006)")

Liberia: Iron Ore Appraisal and Exploration Agreement for the Putu Range between theRepublic of Liberia and Mano River Iron Ore (Liberia) Inc. (May 18, 2005) ("Liberia-ManoRiver-Exploration (2005)")

Liberia: Mineral Development Ag reement between the Government of the Republic ofLiberia, Putu Iron Ore Mining, Inc., and Mano River Iron Ore Ltd. (September 2, 2010)("Liberia - Putu (2010)")

Liberia: Mineral Development Agreement between the Government of Li beria andWestern Cluster Limited, Sesa Goa Limited, Bloom Fountain Limited, Elenilto Miner als& Mining LLC ("Li beria - Western Cluster (2011)")

Mongolia: Investment Agreement between the Government of Mongolia and IvanhoeMines Mongolia Inc. LLC and Ivanhoe Mines Ltd. and Rio Tinto International HoldingsLtd. (Oct. 6, 2009) ("Mongolia - Oyu Tolgoi (2009)")

Sierra Leone: Agree ment between the Government of the Repub lic of Sierra Leone andSierra Rutile Ltd. (November 20, 2001) ("Sierra Leone - Sierra Rutile (2001)")

Sierra Leone: Draft Model Mining Development Agree ment (July 2012) ("Sierra LeoneMMDA (2012)")

Model Mine Development Agreement 1.0 (April 4, 2011) ("MMDA")

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Printed June 2014